University of Illinois ag economists Darrel Good and Scott Irwin are taking note of the recent spike in country corn basis levels. They note while the stronger-than-usual corn basis signals corn futures are undervalued, they also remind that historical divergences like this typically do not last long.
However, the two say south-central Illinois corn basis has remained elevated since before the 2011-crop harvest. "Some have argued that the small crop of 2011 and ample storage space has uniquely allowed farmers to easily store the crop requiring a strong basis to motivate additional sales. That explanation alone is not sufficient to explain the strength in the basis," they say. "By that logic soybean basis, for example, would also be record strong, but it is not."
To read their complete analysis of basis, click here.
They continue: "The continuation of the extremely strong corn basis over a relatively long period of time suggests that the rate of feed and residual use of corn may have been more rapid than implied by the recent quarterly stocks estimates. That scenario would imply that recent stock levels have been over-estimated and that stocks at the end of the year will be smaller than currently forecast. That scenario would be a convenient explanation for both the strong basis and the apparent under-valuation of corn futures prices. Judging by the magnitude of the current basis compared to normal levels, futures prices may be under-valued by about $.30."
Will upcoming Quarterly Grain Stocks Report reflect a usage adjustment? "If feed and residual use of corn has been under-estimated in recent quarters, one would hope the under-estimate is revealed in future quarterly stocks estimates from the USDA," say the two. "There is clearly much more than the normal uncertainty about the accuracy of these estimates. Such uncertainty will make it difficult to anticipate the level of reported stocks for several more quarters. Undoubtedly, further bumps ahead."