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Market Commentary for 3/18/22
For the week:
- July corn finished down about 16 cents
- December corn finished down about 10 cents
- November beans finished down 28 cents
- July wheat finished 62 cents lower
Over the last 2 weeks, the corn and bean markets have moved into a sideways trading pattern. The market remains uncertain on what will happen to the old crop corn and wheat trapped in Ukraine and how much of their new crop will get planted this spring or harvested this summer.
Why Corn Basis Values Are Down and Possible Summer Basis Outcomes
Since war broke out in Eastern Europe corn futures have seen a big rally, while the basis market has suffered. Many variables are affecting the basis market including the spreads between the May and July contracts, end user demand throughout the US, and overall freight costs to move the grain.
When Russia invaded Ukraine, many traders believed it would lead to a possible grain shortage. Therefore, funds started buying the market, which drove futures prices higher. This rally led to a rush of farmers selling their grain. With the sudden movement of cash priced grain about two weeks ago, many US end users quickly dropped basis values to slow the rate of grain they were buying.
One big way end users were able to drop basis was to shift their bids from the May contract to the July contract. Due to the market’s quick reaction to the situation in Ukraine, July futures were increasing at a much slower rate than the May futures. So, while it seems like basis values are higher now compared to before the Ukraine invasion, they are lower when accounting for the spread between contract months of May and July.
Moving forward the basis market against the July contract could also be affected by rising fuel prices, the backlog of railcars, and fewer trucks available to move grain. These factors have led to higher basis values at export facilities. However, due to increased freight rates back to the Midwest, local bids are trading closer to values we typically see this time of year. If the demand for exports picks up moving into the summer, then basis values still have a chance for higher values.
However, several commercial elevator managers noted this week that one major US railroad operator sets their fuel surcharges only 30 days out and bases those rates on the 30-day moving average of fuel prices. This makes it very difficult for grain buyers to know how much it will cost them to move grain month to month and with the wild fuel price increases since the beginning of the war the freight rate increases these facilities are dealing with have been extremely expensive. Therefore, many commercial traders have adopted a “wait and see” approach, which is reflected in their lower basis value bids for summer shipment periods.
With no carry in the market, commercial elevators also have no incentive to store any grain moving forward. Consequently, many have likely already traded their positions away and will not have any more grain to sell in the market until farmers sell them more. This seems to have contributed to the big basis decline in the market over the last few weeks. However, it could also suggest the basis market will likely have to deal with limited grain availability at some point for end users and exporters from late June through early September.
How Likely Will Farmers Sell Their Remaining Grain in Storage?
Market traders seem to believe farmers, as a whole, have traded 80% of their physical corn supply already for the 2021 crop. In conversations with producers who still have grain in storage, most are concerned with summer weather, geopolitics, inflation, and the general feeling of the unknown. Many seem to be waiting to see what their crop looks like in the middle of summer before selling their remaining grain still in storage regardless of the price point. I suspect it could be extremely difficult for end users to pry the last 20% of corn out of farmers hands before July 4th. If there are any indications of dry weather this summer, it could mean the possibility of higher basis values down the road.
Want to read more by Jon Scheve? Check out recent articles:
How Likely Is It That Corn Will Trade Below $7 or Above $8?
The Market Is In A State Of Fear And With That Comes Volatile Prices
What Fundamentally Changed To Grains In The Past Week?
Will Corn Test $7 Or Will It Return Back to $6?
Will South American Yields Be As Bad As Predicted?
Setting Bean Basis At The Highest Level Of the Year
How A Range-Bound Market Left Me With A Sale Above The Current Market Value
Jon Scheve
Superior Feed Ingredients, LLC
