Is Basis Strength Signaling a Shift in Control?
Oct 27, 2011
The 2011 corn harvest has been unique for the strength in basis during a time of year when it can be at its weakest. Whether it's the national average, CIF, Gulf, or local bidders, basis strength in October and November is a rarity, especially this year given the drop in corn demand that the last two WASDE's have led us to believe, albeit question vigorously. This strength also seemingly contradicts the September Quarterly Stocks Report (QSR).
While the market struggles to validate the 1.128 billion bushels of corn in beginning stocks, co-ops and ethanol buyers in Northeast Iowa report the corn they purchased in the period preceding harvest was poor quality and light in weight.
While a somewhat small sample, this suggests that producers emptied out their on-farm bins for the first time since 2009, the last year we saw widespread quality issues, and may give credibility to the roughly 200 million bushels "added" to inventories.
That said, the consumption rate will be higher on these low quality bushels of 2009 corn. While 2009 produced over 13 billion bushels according to final USDA numbers using a volume metric; it was much lower than that when the weight metric was applied. 2009 was a year that lacked degree-days and the late harvest of wet corn left producers without adequate storage or drying capabilities, delivering a highly discounted, low quality product.
Producers have always struggled with controlling their own fate. As the joke goes, they pay retail for inputs, sell outputs at wholesale, and pay the freight both ways. There was nothing amusing about 2009 when basis weakened to -90 cents in many locations.
After the 2009 harvest many farmers decided to take control and built or upgraded dryers while adding storage capacity. While 2011 has been a stark contrast to 2009 in the moisture department, the conscious decision to add drying and storage capacity two years ago has had the somewhat unintended effect of a shift in control of stocks away from the commercials and into the hands of the producers.
While the new dryers may be idle, the on-farm bins are filling up, leaving little corn to be sold directly "off the combine" due to lower yields. This year's low moisture levels also leaves corn in ideal condition to be "binned" until prices appreciate or taxes are due.
The September QSR stated that on-farm corn stocks were at their lowest level in decades which, when added to newly built storage capacity, left farmers with plenty of storage to control when corn is released to the market. The end result appears to be a fairly significant shift in pricing power away from commercial users. This shift is not without ramifications however as producers need to market their available corn wisely and not hold onto the crop too long or risk flooding the market after blending subsidies expire early next year or room is needed for the 2012 corn crop.