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Year ends with strong basis gains

Agriculture.com Staff 01/03/2008 @ 8:15am

This year has definitely been one for the record books when it comes to sky-high futures prices. But perhaps what has been just as surprising is the ability of the cash market through basis to be bullish as well.

Basis levels in corn have gained 23 cents a bushel on average across the U.S since mid-October while soybean basis was up about 33 cents over this same time period. These gains are about twice the norm for this time of year. So what is causing these unprecedented gains?

There are two main drivers in basis swings this year. First, tight storage space kept basis levels exceptionally wide at harvest. If you look at the combined corn-bean crop in 2007, it accounted for 75% of available storage space in the United States. By comparison, the 2006 crop for corn and beans accounted for 67% of available storage space. Thus, larger crops put more pressure on basis at harvest, but the market rewards those that store the grain out of the harvest window with strong basis gains.

The second driving factor has been a decline in barge rates. Going back to September, barge rates from St Louis to the Gulf were $1 a bushel - nearly as high as they were in the post-Katrina aftermath. Today, barge rates are more normal at 35 cents a bushel at St Louis. That 65-cent swing in barge rate helped boost basis levels at river terminals and nearby country elevators after harvest.

In corn, basis gains were strongest in the Iowa-South Dakota ethanol corridor. Gains of 30-cents or more were fairly common in these regions. In addition, Eastern Cornbelt markets had strong gains thanks to strong demand from the Carolinas pulling more corn in.

In the soybean market, gains were more pronounced in the Upper Plains. These regions were starting from miserably low basis levels at harvest as elevators were not willing to take beans. Also, river markets saw impressive basis gains thanks to falling barge rates.

Where do we go from here? We should continue to see solid gains through much of the next few weeks. Many producers continue to hold fairly tight to cash grain, expecting the bull market to continue. However, keep in mind forward premiums in the cash market are starting to disappear as basis levels strengthen. The rewards for carrying grain need to be carefully weighed against the costs. At a 9% rate, $4 corn costs you about 3 cents per bushel a month and $10 soybeans cost you 7 cents a bushel per month. Add on to that any physical costs of storing grain (either commercial storage or drying costs in your own bin), then you've got costs that are at least 5 to 9 cents a bushel per month to store corn and beans, respectively. That's a hefty price tag so you will want to weigh your marketing options carefully.

This year has definitely been one for the record books when it comes to sky-high futures prices. But perhaps what has been just as surprising is the ability of the cash market through basis to be bullish as well.

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