Cash grains: High futures erode basis, demand
U.S. cash corn basis has eroded as historic spot prices force end users to look for substitutes or cut consumption.
Record high corn prices have slowed demand from processors and livestock feeders due to poor profitability margins. Domestic and export demand for corn continues to drop, reflective of the sharp rise in corn prices.
Overall slower demand has led to a gradual erosion of basis levels, mostly from the ethanol industry, said Hugh Whalen, commodity risk consultant with MID-CO Commodities in Bloomington, Ill.
U.S. ethanol production dropped to 796,000 barrels a day in the week ended July 20, the lowest level in two years, and down from 802,000 barrels the previous week.
Cash merchants continue to report weakness in ethanol basis, as profitability margins turn negative from the rise in corn values and slower U.S. gasoline demand.
End users aren't interested in paying $9 a bushel for corn, and instead are looking at substitutes or only purchasing supplies on a short-term basis until they figure out the size of the 2012 U.S. crop, said Tregg Cronin, analyst at brokerage Country Hedging in St. Paul, Minn.
In central Illinois, a major grain processing area that houses plants from Archer Daniels Midland Co. (ADM) and A.E. Staley, cash basis for corn is quoted at 38 cents over September Chicago Board of Trade futures, down from 70 cents over at the same time two weeks ago.
Slower demand is reflected in barge basis on the Mississippi River as well, with basis ranging from 70 cents to 75 cents over September futures, down from 85 cents to 90 cents over futures last week, Mr. Cronin said.
"The drop in demand shows the market is doing its job of slowing usage or effectively pushing demand further out," he added.
Meanwhile, many feedlots across the U.S. aren't reporting bids for corn, a reflection of slower demand and a willingness to await cheaper supplies from the fall harvest.
Smithfield Foods Inc. (SFD), the world's largest pork producer, said Tuesday it will import corn from Brazil, a move that reflects how surging costs for U.S. feed grains are rippling through the livestock and meat industry.
The cost of animal feed is a critical factor for big livestock producers, such as Smithfield, which buy millions of bushels of feed each year as they stock the meat supply chain with new pens of animals ready for slaughter.
Corn at Brazilian ports is currently going for around $290 per metric ton, compared with $345 in the U.S. Gulf of Mexico. The cost of shipping corn to the U.S. from Brazil amounts to between $30 and $40 per ton extra.
U.S. corn exports have slumped in response to high U.S. prices and the fact that cheaper Brazilian supplies are undercutting U.S. exports, Mr. Whalen said.
U.S. exporters are paying 70 cents to 80 cents above September CBOT futures for corn at the Louisiana Gulf, down from 76 cents to 89 cents over futures last week, according to data from the U.S. Department of Agriculture.