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Futures rally hasn't hampered basis

Agriculture.com Staff 10/11/2006 @ 9:57am

You wouldn't know it by looking at basis that it's harvest time. Over the past few weeks as harvest has stalled, basis gains have been fairly widespread as end-users scramble to cover there needs.

Now, the futures market has joined the parade and rallied sharply higher in recent days. Can basis continue to hold up? Probably not.

As much of the Midwest harvest had been hampered by rains that left fields too muddy, harvest had slowed to a crawl. However, last weeks warm, dry weather allowed farmers to resume fieldwork and should quicken the harvest pace. With the surprising gains in futures, farmers will likely be moving more grain to market as opposed to storing with such favorable cash prices that could quickly erode basis.

On a regional level, corn basis has been mostly stronger in Kansas, eastern Nebraska and western Iowa. End-users in these regions seem to continue to bid higher for corn supplies with some key buyers being up 5 to 10 cents on basis for the week. In the Delta and eastern Corn Belt, where harvest is further along, basis levels have started to erode. Also, adding pressure are stronger barge rates along the Ohio and lower Mississippi river this past week.

For soybeans, basis levels in the southern Plains and western Corn Belt have also been modestly higher. The eastern Corn Belt has seen some pressure in the past week due to harvest and higher barge costs.

With harvest still underway and futures prices shooting sharply higher, we look for grain elevators to quickly fill up and basis levels to head lower in the next month. Forward carry in the cash markets still remains favorable for much of the Midwest, even after the sharp price rally.

In the corn market, for example, price spreads between spot and December delivery are 9 cents a bushel while delivering in March earns 20 cents more than spot delivery. We would expect these premiums to quickly dissipate at these high prices. So, now is probably a good time to take advantage of the large carries in the cash market. If you forward contract, then reownership with call options could help you stay in the game if the market continues to be bullish this fall and winter.

You wouldn't know it by looking at basis that it's harvest time. Over the past few weeks as harvest has stalled, basis gains have been fairly widespread as end-users scramble to cover there needs.

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