Opinion

The Spread Between Posted Bids And Prices End Users are Willing To Pay Could Be More Than 60 Cents

Market Commentary for 7/30/21

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Corn futures continue to trend sideways, as the market waits for the August 12^th USDA yield estimate.

With the 2021 corn harvest starting in several southern states this week, basis values will soon start to come under pressure. Old crop corn basis levels have been dropping over the last few weeks, but many basis bids throughout the US still hover around +60 to +70. During the middle of harvest most of these same locations will likely be bidding -40 to -30. This would mean a $1 per bushel decrease in basis values between now and the end of September regardless of what futures prices do. While the upcoming decrease will likely be slow for the next 2 weeks, it will decrease rapidly as harvest pushes northward.

This past week the Gulf barge market, which is the most widely traded basis in the country, had bids and offers as wide as 60 cents. It’s rare for this market to be more than 6 cents apart, so this suggests current flat price values aren’t high enough to incentivize farmers with stored grain in the bin to make sales. Also, with lower posted basis bids, the market is indicating most end users have their short-term needs covered. However, there are reports a few end users have strong basis bids that aren’t publicly posted in place to meet their weekly requirement needs.

Some end users who still need to procure grain are using unusual tactics with their posted prices. One end user decreased their posted bids by 25 cents, but then was willing to pay 60 cents above that new posted price for anyone willing to make a new sale for quick shipment. When asked why, they said they had too much corn on “free price later” that they had already used up. Plus, they saw no reason to maintain higher basis values for farmers with remaining stored grain at their facility, because those farmers will likely price that grain over the next month before harvest anyway.

This illustrates why farmers who use “free price later”, or deferred pricing, will eventually pay a very high price for something that is labeled as “free”. Most types of deferred pricing are very beneficial to those end users offering that kind of service because the basis values in those contracts are tied to the whims of the company they are sold to. It’s important to remember that in grain marketing nothing is ever free. There is a cost to provide “free” storage because these locations are taking on the risk of basis dropping. After all, they don’t want to pay higher prices than they need to. Bushels on free price later or deferred pricing are captured bushels with no other competitive opportunity to be sold elsewhere.

Ideally, no farmers would move grain before setting the basis level first because that would force the market to bid a real price for all grain, which would benefit all farmers collectively. Unfortunately, there will always be a few farmers who don’t understand how their actions hurt themselves and all other farmers at the same time.

Another farmer told me that they sold a basis only contract 2 weeks ago for +80 to their local coop. That coop then dropped their posted bid to +65 cents. The farmer ended up 2 loads short of filling his contract, so he asked the coop to buy his way out of the shortage. The coop said there would be a 35-cent charge above the current posted basis value to get out of the contract. The farmer was shocked there would be such a high penalty, since posted bids were much lower from what he had sold.

When farmers are short on a contract, the grain buyer will also be short on the contracts they have sold and must find someone in the market to cover it. And when there is limited supply in the market, like right now, the end user will usually have to charge much higher values to get themselves out of the short situation the farmer created. This increased cost will have to be passed on to the farmer who was short.

When the inverse spreads showed up in the market after February 1^st, July futures were so much higher than September in late spring. In a market inverse, no hedger wants to keep any inventory on hand because the grain is worth less with each passing day. This incentivized all commercial grain companies to have their grain basis levels sold by late June. Since most end users also hedge grain, some aren’t holding on to very many bushels either and have limited supply, because they know corn basis will drop as harvest approaches.

In the end, the farmer who was short a couple loads secured grain from a neighbor at better values than what the coop was offering to cancel the contract. The neighbor got a premium for the loads, the farmer didn’t have to pay as high of a price as the penalty the coop was going to charge, and the coop could still honor their commitments to their buyers on the other side. It was a win for all players in this case.

The basis market will likely continue to struggle with posted bids not truly representing what the market is actually trading for another 6 weeks. Therefore, any farmer with remaining stored corn should get bids with multiple end users because they may be pleasantly surprised what is still available. However, one might want to avoid waiting too long. Harvest is quickly approaching, which will eventually put downward pressure on basis values soon.

Want to read more by Jon Scheve? Check out recent articles:

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