Basis is the difference between cash price and futures price. Several factors determine basis, including local supply and demand issues and operating margins. Basis includes transportation costs to move bushels from an elevator to a processor, river terminal or mill. Efficient transportation lowers costs and strengthens basis.
That’s why farm groups have lobbied for decades for funds to improve locks and dams on U.S. inland waterways. River terminals and the barge system have been and still are an efficient system and move millions of bushels annually.
But upgrades are needed to assure the system supports U.S. exports. Brazil will grow more corn in coming years than it did this year, and the country can expand soybean production annually. Brazil is making the needed investments to move those bushels to export locations and the U.S. infrastructure advantage is narrowing.
REASONS TO BE OPTIMISTIC
It’s reasonable to be optimistic about future domestic corn and soybean demand. In the University of Missouri FAPRI five-year projections, steady growth of biofuel production is expected to help hold corn prices above $4.40 for the 2022 and 2023 crop years, before prices drift lower to a projected $4.18 in the 2026 crop year.
Increased soy oil demand for biofuels will help hold on-farm cash soybean prices above $11.75 in 2022 and 2023 crop years, according to FAPRI projections, before drifting to $11.09 in the 2026 crop year.
But without export demand, prices would be lower — much lower. Even with increased Brazilian production, soybean exports are expected to total more than 2 billion bushels in each of the next five years, per FAPRI.
Corn export demand was a record high in 2020/21 due to Brazil’s crop losses and the strong Chinese corn buying. China will likely be a major player in the corn export market over the next five years, helping U.S. shipments get back to last year’s record by 2026.
Greater transportation efficiencies will only make U.S. exporters more competitive, will support basis and put more revenue in producers’ pockets.
STRONG VERSUS WEAK
Basis analysis is the first step when selecting a marketing strategy. When basis is above the three-year average at your delivery points, use a strategy to lock in basis. That means using a cash-market tool. If future prices generate you profits, that cash sale normally ends the marketing year.
If, however, prices are below breakeven (even though basis is strong), the potential that prices will rise after the sale can be managed with futures and/or options.
When basis is below the three-year average, use a strategy that leaves basis open — hedging in futures, a put option or a hedge-to-arrive contract in the cash market. If futures are at levels that generate profits but “basis stinks,” lock in price and capture basis improvement as it strengthens. FJ
