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Time to watch basis and spreads

Agriculture.com Staff 05/25/2007 @ 1:08pm

Some very interesting things have been going on in the corn market. Reaction to the latest crop conditions report was surprising. After one day lower based on planting progress better than anticipated, the market rebounded. It is a positive indication when prices hold together or improve following a bearish report.

When the market rebounded, nearby futures went up more than deferred. That is also a positive indicator. At the peak last February, July futures were $0.29 higher than December. As prices dropped, July futures lost ground faster than December futures. Seeing the old crop futures gaining on new crop futures indicates demand for the grain now as opposed to anticipated demand in the future.

Maybe the most positive factor is the basis. At my local elevator, cash corn basis has improved 18 cents in the last month. The basis is better now than at any time in the last two years. This also indicates true demand. It may also indicate that there is not a lot of corn still in farmer's hands.

My hope is that the basis and spreads get to the point where it is cheaper to sell the corn and buy call options than it is to hold the grain unpriced. This strategy worked in the soybean market in 2003-2004. We are about half way there now in the corn market. Current cash bids locally are $0.32 over new crop. That difference would pay the premium for an at -the-money September call. However, much of that spread is the result of a terrible basis on cash forward contracts.

These are interesting times. There are going to be some unusual opportunities as the summer progresses.

Some very interesting things have been going on in the corn market. Reaction to the latest crop conditions report was surprising. After one day lower based on planting progress better than anticipated, the market rebounded. It is a positive indication when prices hold together or improve following a bearish report.

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