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Wide Basis Drops North Dakota Corn Prices Below $1.80/bu.

14:39PM Sep 30, 2014
elevator grain pile storage

In North Dakota, corn prices at two grain elevators have dropped to levels producers thought they’d never see again: $1.73 at one facility, $1.81/bu. at another. Bids at a third elevator near Minot, N.D., were 43 cents higher than the lowest bid at $2.16 on Sept. 29, AgWeb’s Cash Grain Bids tool shows. The driver is incredibly wide basis, more than $1.50/bu. below futures quotes at some locations.

"Grain storage (in the state) is going to be tight," says Frayne Olson, ag economist at North Dakota State University. "It’s going to be close. I think we will have room for everything, but will some corn be stored on the ground? Yes."

Minot’s basis is 92 cents wider than one Sioux Falls, S.D., area elevator, 615 miles to the south. For most of North Dakota, new crop bids are in the $2.20 to $2.40/bu. range. Even though corn prices are just $2.93 in Campaign, Ill., with a 30 cent basis, that’s still more than a $1.20/bu. spread between there and Minot.

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Bids Below Even Variable Costs

That puts new crop corn prices below even variable costs for North Dakota corn producers, but it’s not just corn prices that are tanking to the lowest level in years. Soybean prices, too, have tumbled far below breakeven, to just over $8/bu.

Causes for such wide basis in North Dakota involve the interplay of several factors. Key among them is that some elevators are dealing with large quantities of small grains at the same time a larger-than-expected corn crop is about to be harvested.

Elevators are wrestling with two choices, Olson says: whether to cap how much corn to buy or store for farmers, or whether to accept all corn, which forces them to widen basis. The above bids reflect the latter.

Earlier, the problem looked less severe because of reduced corn acreage and more soybeans. But USDA’s September Crop Production report numbers shows yields 22 bu./acre higher than 2013. That means that corn handled will likely be only 20 million bushels less at 376 million.

"Total bushels handled is not changing all that much. This is not the drop everyone was expecting," Olson says.

An additional challenge is that North Dakota has increased corn production more than any other state over the past decade. "Replacing 60-bu. wheat with 120-bu. corn doubles the grain volume," Olson says.

At the same time, both on-farm and commercial storage has increased to largely match this growth. "A lot of new shiny tin is out there," he says. Still, when all the pieces to the storage puzzle aren’t in perfect alignment, the system can be stressed, as it is this year.

Basis Emerging National Issue

While the storage problem is most severe in North Dakota—with accompanying wide basis to prove it—it’s also a national problem, says Chad Hart, ag economist at Iowa State University. "The basis problem will spread out," he predicts.

As the northern and western fringes of the Corn Belt fill up, grain produced there without a storage home and wide basis will seek areas, such as Iowa, with more storage and narrower basis, he says. But once storage there starts to fill up, basis in the I-States, too, will widen. "The market is trying to figure out basis," Hart says.

It’s not only the massive 2014 crop, either. "I’m amazed at how much old crop (2013) is still out there," Hart says.

Nationwide, the problem is not that the country is in a storage deficit, but that it’s not always where it needs to be, adds Darrel Good, University of Illinois ag economist. He calculates that the U.S. will have 1 billion bushels of excess capacity, even factoring in the 2014 crop.

Hart predicts that the storage—and in turn basis—problem may recede somewhat after a couple of months post-harvest when corn starts being moved to end users. At the same time, farmers will not be selling any bushels they don’t have to at current bids, possibly doing very little—if any—selling before spring.

Another huge issue factoring into the equation is transportation, particularly rail, the preferred grain transportation mode in North Dakota. "The hot button topic here is rail," Olson says. "Everybody is blaming everybody else."

While the Burlington Northern Santa Fe has largely caught up from earlier delays, it remains to be seen whether harvest pressures will allow timely rail service or whether it will be a repeat of last year. "Canadian Pacific numbers are a bit more confusing," Olson adds.

Weather Key Determinant to How Low Basis Gets

A big piece to the storage puzzle in North Dakota is how long harvest lasts. This year’s wheat harvest took place over a long time period, allowing both elevators and rail carriers to deal with it in a timely manner and avoid major storage backups.

If corn harvest is similar, the system will be in a better position to deal with it, Olson says. But if harvest weather is perfect, farmers run 24-7 and it occurs within a tight window, storage problems will be more severe. What’s good for farmers—a warm, dry fall—is not necessarily good for the storage system, he adds.

The math on storage capacity versus harvest doesn’t tell the entire story, either, Olson says.

"The challenge in North Dakota is the wide range of quality of barley, spring wheat and durum," he says. Because of the huge difference in premiums and discounts, "farmers don’t put high and low protein wheat in the same bin," Olson adds. "It’s not like corn and soybeans."

Because of that, a lot of grain bins will only be partially filled, further pressuring the storage system for all crops.