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Cash corn basis slips as futures explode

07/05/2012 @ 2:50pm

U.S. cash-corn basis levels stumbled Thursday as spot-month futures rallied to 10-month highs.

Soaring futures prices sparked a pickup in cash business, with cash merchants reporting an increase in country movement after a jump in cash and futures prices in prior days. The drop in basis was witnessed across the cornbelt, but the largest declines were reported west of the Mississippi River, where farmers are more comfortable with production prospects.

Spot CBOT July corn futures were trading near $7.73 a bushel Thursday, up 20% from last week, while September corn was trading near $7.09, up 13% from last week.

Weather conditions have played a big role in farmers' willingness to part with inventories. In the western Midwest, rain has allowed for better yield prospects, as crops have enough moisture to withstand severe Midwest heat. Eastern areas haven't had that luxury, with heat adding to the problem of limited moisture since the spring.

"We have seen huge country movement from commercial elevators and farmers," said Karl Setzer, analyst with MaxYield Cooperative in West Bend, Iowa.

"It's been a freefall for interior basis, resulting from a combination of farmer selling and end users scaling back buying due to poor margins for livestock feeders and ethanol plants," Mr. Setzer said.

Once cash and futures prices climbed above $7 a bushel, a lot of selling pressure emerged for spot-market cash corn.

The decline in domestic demand is reflective of some ethanol plants choosing to temporarily halt some operations. The result of the closures is forcing some previously contracted corn purchases by ethanol plants to be sold back into the market.

"There has been a significant pullback in corn and soybean basis, with basis levels dropping 9 1/2 cents since Tuesday in St. Louis," said Dave Marshall, an independent grain-marketing adviser in Nashville, Ill.

Part of the declines was related to basis rollovers and end users thinking "what can I do to get by," Mr. Marshall said. "There are not as many end users looking for $7 corn or $16 soybeans as there were at $5 corn and $12 soybeans," Mr. Marshall added.

Nevertheless, much uncertainty remains surrounding what farmers will be able to produce, making old-crop corn inventories precious across the eastern Midwest. Grain elevators in the eastern Midwest continue to offer old-crop corn at significant premiums.

In central Illinois, a major grain-processing area housing processing plants from Archer Daniels Midland Co. (ADM) and A.E. Staley, cash basis for corn was quoted at 70 cents over September CBOT futures, while soy basis was quoted at 37 cents over August futures.

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