The merchandising environment
The 2012/13 marketing year has been more difficult than most for merchandisers. Not only has grain volume been sharply reduced, but common strategies of buying during harvest, storing it and selling it later in the marketing year have also been squeezed. Figure 4 displays the national average spot corn basis calculated off the July 2013 futures contract. With basis currently sitting at exceptionally strong levels, it would appear that there is less room to capture basis improvement compared to past years. If you use last year’s maximum basis (the purple line) as a proxy for the upper target of basis appreciation, one can only expect a little over $.14 appreciation in the next six months compared to last year when we observed $.53 during the same time period. However, 2012/13 supplies are even tighter than last year, and we have only started the swing toward an inverse cash market. This suggests that we could easily trade above last year’s basis high as the futures market structure becomes more inverted.
One strategy to consider if you decided to carry unsold corn inventory into the next month is to hedge that inventory off the July 2013 futures contract. By doing this you put yourself in a position to gain if the corn market continues to move toward an inverse structure which is typical in years when stocks are tight. However, this strategy would not work well if the corn market returns to a carry.
Despite the difficult merchandising environment there are still opportunities in the cash market, whether you find them north of St. Louis because of improving river conditions or by responding quickly to a shifting market structure. Keep a close watch on cash market movements from a national level to help identify and plan for regional opportunities.
Cody Bills is the director of client services with Grain Hedge, a technology-based firm providing merchandisers low cost trading solutions and a cash market intelligence platform designed to research basis trends and identify selling opportunities. For more information, visit www.grainhedge.com or call (877) 472-4607.