Cash Grain Analysis
Market shifts point to tight supplies, varied demand
River outlook
On Dec. 17, 2012, contractors began removing the “rock pinnacles” near Thebes, IL, which has forced river closures between 6 a.m. to 10 p.m. every day. Barges have been able to pass only during the night and early morning. Removal of the most threatening rock pinnacles at Thebes, IL, is scheduled for completion around Jan. 13, which adds around 2 feet of depth. Additional runoff from winter storm Gandolf is also forecast to raise the river depth to around 12.5 feet from only 3.8 feet on Jan. 9. Considering the pace of river work, and the additional runoff from the winter storm, it looks more like we will be safe from any significant river closure until mid-February.
For a while now, basis has been depressed at river terminals north of St. Louis because of the possibility for river shutdowns. Now that the river seems navigable for at least another month, we expect to see basis rise at those river facilities. The impact could not only be seen along the river, but will ripple throughout the countryside.
Figure 3 displays the impact to basis after barge rates spike $.20 and shows how a rise in transportation cost along the river is transferred along into the countryside markets. Though in Figure 3 we are observing a negative impact on basis, we believe the improving situation surrounding the river will impact the same areas in a positive way and could provide a basis selling opportunity for country elevators and producers within the Figure 4 “impact zone.”
Though the river situation is improving and the Army Corps of Engineers is confident that there will be no Mississippi River closure, if the weather outlook deteriorates, the situation could change quickly. If a dry weather pattern continues, we could easily find ourselves worrying about river closures in a month. Be wary that any basis improvement along the river could be short-lived if the weather outlook once again takes a turn for the worse.
Report shifts cash market
Between September and December 2012 the national average cash corn price averaged $7.38, enough to slow the pace of export sales and trigger the USDA to revise their export forecast 200 million bushels lower than their previous forecast. However, according to the January World Agricultural Supply and Demand Estimates (WASDE) report, prices were not high enough to ration feed use within expectations, forcing them to revise their feed and residual number 300 million bushels higher.
In response to higher than expected demand, the cash curve adjusted sharply following the report. On Jan. 3, the U.S. average cash corn market had a $.09 carry between Spot and May delivery, but that quickly evaporated following the reports release. By the end of the day the carry only posted $.03 cents. The average U.S. cash market is now clearly moving toward an inverted market structure to draw any remaining unsold bushels out of the producer’s bins.
As corn prices move higher to curb demand in the feed sector, export sales will continue to suffer, putting pressure on corn basis at the river terminals.
The soybean cash market has already been inverted for quite some time as a result of tight supplies and strong domestic and international demand. Strong soybean export sales have supported basis strength along the river system. Soybean crush numbers have been off the chart with National Oilseed Processors Association (NOPA) reporting 157.3 million bushels crushed in November, the largest monthly total in three years. Iowa alone showed a 13% YOY increase in bushels crushed in November despite soybean production declining.
On Jan. 3, the national average carry between spot and May delivery was $(-.21) and the January WASDE report did little to change it. Demand this strong doesn’t necessarily warrant prices climbing back to the highs since much of the forecasted demand was expected to be front-loaded, but it does provide a strong argument for near-term price support at least until soybeans start coming out of the fields in South America. Look for soybeans to benefit most from any basis increases north of St. Louis since foreign export demand continues to be robust.
