TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
THIS WEEK’S STOCKS REPORT VALIDATES STRONGER BASIS
Basis levels for corn producers have been a bright spot, due to much stronger-than-usual cash prices. There may be many reasons why a strong basis can occur, the most typical is due to tight supply. End users have to more aggressively bid in order to encourage farmers to sell their corn. This week’s USDA quarterly Grain Stocks report perhaps more accurately reflected a tightening supply of corn, as the report indicated an unexpected drop of 314 million bushels from pre-report expectations. This week’s figure representing the supply of corn, either on-farm or commercially stored, came in at 2.114 billion bushels, nearly 13% below the pre-report estimate of 2.428 billion.
For many producers, 2019 has been a challenging year. Delayed fieldwork from a rainy fall in 2018 followed by a wet spring this year set the stage for a smaller crop in 2019. The USDA is currently estimating yield at 168.2 bushels per acre compared to last year’s 176.4. A 3-million drop in planted acres as compared to the March Planting Intentions report and now, for many, quality concerns due to high moisture and low test weights are affecting farmers’ decisions to sell both old crop from last year and new crop from this year. End users have recognized these struggles/issues and have been willing to pay more for corn.
Some might make the argument that the stronger-than-usual basis is a futures market issue. September and December futures pushed to new contract lows in early September, helping to create an environment for stronger basis. Much of the selling in the futures market may have been speculative, as managed money (according the weekly Commodity Futures Trading Commission report) indicated a net short position of well over 150,000 contracts. In other words, the funds may have been selling a chart price trend which pushed futures prices lower and may have, in a sense, created a disconnect between futures price and cash prices.
Others might suggest basis levels are strong due to farmers holding old grain more than in previous years, or that demand is better than expected, or supplies have been over-estimated on previous reports. Perhaps it is a combination of all three. The report this week did highlight that on-farm storage as of September 1 was 753 million bushels, compared to 620 million bushels last year. One could infer farmers are stingy sellers, waiting for better prices, or holding corn back to blend with new crop to bring the mix to a higher quality level. Tight basis levels likely also reflect the lateness of this year’s crop. One third of the crop was planted after June 2, which implies that a normal harvest will not occur this year, and the crop will take longer to mature. More importantly, weather over the last month has been less conducive to rapid maturity. Corn standing in fields will likely be more prevalent this year during late October or even early November, as producers wait for their corn to dry down to a more acceptable level.
For whatever the reason(s), basis levels this year are stronger. The bottom line is that a reduction of 300 million bushels is significant, and a potential major impact to future price movement. After the report, prices have moved higher, reflecting expectations of tighter supply and, in turn, less carryout for the upcoming season. This could keep basis levels firm. On the other hand, as futures rally and more corn makes its way to market as harvest progresses, basis will likely widen. The key takeaway is that the report confirmed tighter supply. Your action is to take advantage of tighter basis. Do this with basis contracts, or spot sell corn this fall and re-own with futures or call options.
If you have questions or comments, contract Top Farmer at 1-800-TOP-FARMER extension 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.