Market Commentary for 4/19/24
Many US farmers are not selling grain at current low prices. This may be because many farmers had a $5 breakeven for their 2023 corn crop. It seems farmers are not wanting to sell corn at cash values below $4.50 before they plant next year’s crop.
This has contributed to the May / July corn futures spread narrowing from a 14-cent carry two weeks ago to a 9 cent carry this week. The reason the spread would narrow is because there is demand from the export market for cash corn along the Mississippi and Illinois river when farmer selling is light.
That spread change may mean little to farmers, but to those who profit from storing grain, it is more than a 30% drop in potential revenue over the next two months.
Additionally, the basis has had at least a 10-cent increase in the western corn belt over the last few weeks. The eastern corn belt has also increased 5 cents. End users and grain buyers use basis to control the flow of grain into their facility, so this increase in basis suggests supply to end users has slowed.
What Happens Now?
The narrowing of the spread is encouraging commercial elevators to sell their stored grain on basis contracts now while the farmers are planting instead of waiting for summertime shipment. Combine this with basis increasing because end users are short on supply, and you have a potential solution to the lack of farmer selling.
Will Futures Rally?
It is hard to say right now because futures are global, and basis is local. There isn’t a shortage of corn in the world. Even in the US the carryout is around 2 billion bushels, and historically any time the carryout has been this big, futures have eventually traded below $4.
There are some weather issues throughout the US that are likely keeping farmers from rushing out to sell grain at a loss:
- Eastern corn belt – farmers can’t plant due to rain.
- Northern corn belt – farmers can’t plant because it’s too cold.
- Southwestern corn belt – third year in a row of persistent dry weather.
If all these weather issues continue, the possibility of a big futures rally increases, but that won’t be known for another month. Historically, having major weather issues that have a big impact on futures prices doesn’t happen as often as many think.
I’m not expecting a lot of farmers to sell in any meaningful way without a 20-cent price increase or probably July, whichever comes first.
So, Prices Will Go Up?
Not necessarily. Usually if the spread narrows and the basis rallies the futures will increase as well. However, some farmers likely have corn sold against the May contract. That means these farmers need to either price it by the end of the month or roll the sales against the July contract to give them another two months for a price rally to occur before eventually pricing their grain.
If enough farmers need an increase in cash flow and choose to price a lot of corn in the next two weeks, futures could decrease and maybe take the May contract to the lows posted a couple months ago, which are about 20 cents below current trading levels.
Bottomline
Basis and spread values indicate farmers are focused on planting and not selling. Farmers likely continue to wait for better prices or until they see that their crop is planted and looking good in the field before selling at low prices. The futures do not have to rally because the spread and basis could encourage the elevators to move grain when the farmer is not.
If you would like to understand more or have a one-on-one consultation about how spreads and basis effect the price you receive for cash grain, please reach out to me jon@superiorfeed.com.
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