Cash Grain Analysis

The 2012-13 growing season and marketing year will go down in history as a year of extremes. The American farmer experienced the worst drought in a half century and a second straight year of sharp price increases for grains. Along with these higher prices came higher volatility, whipsawing grain prices and straining margin accounts; and, after two years of disappointing production, basis has ratcheted up yet again to historic levels.

Not only did the drought affect how much grain was produced, but it also directly affected its transportation to market. Just one year after severe flooding along the Mississippi River left farm fields buried with silt and debris, the grain industry finds itself navigating some of the lowest water levels since 1988. The extremes witnessed throughout the year have exploded basis to record highs, and shaped unique regional basis trends. The following article outlines the distinctly different trends between corn and soybean cash markets and presents a basis wildcard that could offer opportunity by mid-February.

Strong basis in Iowa

In the wake of the drought, the average U.S. spot corn basis, the difference between the cash price and the futures price for corn delivered in January, has moved 13 cents higher than the same time last year during the 2011/12 marketing year, and 30 cents higher than the four-year average. Soybean basis is no exception, and on average has posted a 19-cent gain across the United States compared to the 2011/12 marketing year.

Figure 1 displays a heat map of basis changes observed December 2012 compared to December 2011. The first major change to note is that Iowa and eastern Nebraska have enjoyed the strongest basis gains over the last year. These basis gains can be attributed to a 19% and 17% drop in corn production throughout Iowa and Nebraska, respectively. This sharp drop in production has shifted the percentage of corn grown in Iowa, which is used to produce ethanol, to roughly 69% from 56% the previous year. Meanwhile, in Nebraska, the amount of corn used for ethanol jumped to roughly 58% from 48%.

Despite weak margins, the ethanol industry continues to demand corn for spot delivery; and has resulted in stronger basis throughout Iowa and eastern Nebraska. Unfortunately, Illinois corn basis didn’t benefit as much despite also having a strong ethanol presence. This is a direct result of significantly weaker export demand, and the uncertainty surrounding a Mississippi River closure near Thebes, IL. Without stronger bidding competition from the river markets, ethanol facility bids will remain more competitive, allowing them to source their supplies without an aggressive bidding competition.

Soybeans: the river effect

During the first portion of the 2012/13 marketing year, which began on Sept. 1, 2012, the pace of export sales has differed greatly between corn and soybeans — resulting in much different cash market landscapes between the two grains.

While corn sales have lagged this year, soybean export sales are running roughly 184 million bushels ahead of the pace needed to meet the U.S. Department of Agriculture’s (USDA) expectations of 1.345 billion bushels forecast in the December 2012 Supply and Demand report. Not only has the export market booked strong sales volume, but exporters have also loaded and shipped the bushels faster than anticipated. Foreign Agricultural Service (FAS) has reported cumulative export sales already meeting 88% of the USDA’s export demand forecast with 61% already inspected for shipment.

This compares to a four-year average of 70% sold and 46% shipped. Figure 2 displays the one year change in soybean basis between the third week in December 2012 and the same period in 2011. This map clearly shows the impact strong export demand has had on river basis. Areas that have not been threatened by river closures, such as the lower Mississippi and the Ohio Rivers, have experienced above average basis improvement by $.24 or more since last year. River terminals north of St. Louis experienced below average basis improvement of only $.14 cents or less due to the uncertainty surrounding river navigation. With the river at risk of closure, many elevators aren’t as motivated to bid aggressively for soybeans if a cost-effective way to ship them to the Gulf isn’t guaranteed.