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Elevators battle basis

Agriculture.com Staff 02/09/2016 @ 2:37pm

CHICAGO, Illinois (Agriculture Online)--The current volatile markets are stoking the industry talk at the annual National Grain and Feed Association conference.

The gathering of country elevator operators and feed industry members here has attracted 600 participants.

Joe Christopher, senior grain merchant for Crossroads Co-op in Sidney, Nebraska, says the cash basis is a hot topic for elevator operators this year.

Basis is defined as the difference between the flat price offered at the elevator and the futures prices offered on the exchange trade, i.e. Chicago Board of Trade.

Coping with higher-moving flat prices, financing inventories, and how quickly you turn over inventory, are the challenges facing country elevators, Christopher says. This is highlighted with the cash basis movements.

"We've seen more movement in the basis than ever before. We're trading the basis. It's been more volatile than ever. We've traded grain at cheaper basis levels this year than in a long time, because of the relatively high flat prices."

Simply, the producer is happy with the higher flat price and turns larger chunks of the crop into cash. Or, they are contracting more of it ahead of time with higher price opportunities offered in the future years.

In turn, the elevator operator protects itself by hedging the bushels purchased. As the market goes up, the producer keeps selling to the elevator. The elevator continues to buy short hedge future calls. This process of carrying short hedges gets costly, Christopher says.

While the demand is supposed to be very good, it's not all there," Christopher says. "This creates a situation for the elevator to carry a high-priced commodity for a longer period of time, until you can ship it."


Wheat is showing signs of heading toward very cheap basis levels during harvest season, Christopher says.

"The current surge in old-crop wheat prices will drag new-crop prices higher. But, with an expected 20% increase in wheat plantings, and already made $7.00-$8.00 new-crop wheat sales, we're on track to trade new-crop wheat basis at unbelievably cheap levels. Good prices for the producers, but the elevators will take the hit," Christopher says.

Once again, the perceived demand will not match the physical supply, Christopher notes.


While wheat basis is seen staying wide, analysts told those in attendance, the soybean basis is on its way to narrowing.

Mark Ditsch, LaSalle Group market analyst, says the U.S. soybean supply will be tight for everybody, not just in the minds of the speculators.

"We're forecasting a much tighter carryout than the USDA," Ditsch says. "It may not happen right away because the elevators and processors already own a lot of the soybeans. But, as we move forward in 2008, the physical tightness will catch up with the perceived tightness."

Because this year's northwestern Corn Belt's soybean crop was better than the southeast, some processing plants in the eastern Corn Belt could be pushing soybean bids up early, Ditsch says.

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