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Miles to money
For those who like to see action in the grain markets, the past year has not disappointed. Corn, soybeans, and wheat have all seen enormous moves over the last 12 months, with each one being driven by distinct underlying fundamentals.
Corn led the charge over the past year, driven first by significant demand strength and then by U.S. supply concerns in the summer and fall. As a result, prices have posted new all-time highs and managed to hold those gains fairly well of late. For beans and wheat, the bullish enthusiasm has been more tempered, fueled either by short-run demand or supply concerns. But even here prices are at exceptionally lofty levels.
Can you count on another year of escalating grain prices? Will the tide turn and prices start to head lower?
Lacking a clear crystal ball, I never think it is a good idea to make strong claims one way or the other about future price direction. But what does seem clear is that exceptionally strong prices are taking their toll on the demand base for commodities.
U.S. grain exports have been sluggish of late and seem likely to underperform throughout the coming marketing season. China recently has turned to South America to satisfy its soybean appetite, taking a toll on U.S. soybean sales. Wheat has faced competition from Black Sea markets, and corn has seen slow export business as cheap sources of feed wheat are substituted in world markets.
Ethanol usage has driven the corn market for the last several years. This year has been no different, with high profit margins leading the charge. Yet corn usage for ethanol was estimated to fall nearly 100 million bushels for the 2011-2012 marketing year. The biggest question mark for the ethanol industry comes from the subsidies and tax credits that are set to expire at the end of the year. Will these expirations kill the ethanol industry despite good profits and export demand from Brazil?
With so much uncertainty on price outlook, it may help you to turn your attention to a more predictable element for making marketing decisions this year: local basis.
Best basis plays
Last year saw astronomical gains in corn basis. Between November 1 and July 1, U.S. average corn basis gained 60¢ a bushel, or about 7.5¢ per month. Soybeans has relatively strong gains as well at 50¢ over 8 months (6.25¢ per month), but not as off-the-chart gains as corn.
Strong demand for exports and ethanol usage helped drive corn basis sharply higher over the marketing season. While soybeans benefited from strong export demand and South American harvest delays, which buoyed bean basis in the spring.
This year should prove to have different underlying fundamentals. For one, demand factors in the corn market may be less prominent this year. Export and feed demand should be lower as a result of sharply elevated prices, while ethanol demand is likely to be stable but not explosive as in years past.
For beans, supplies seem to be abundant both domestically and in South America. And demand from China may not materialize until the second half of the marketing year.
As such, expect to face two very distinct postharvest cash marketing opportunities in 2011-2012.
For corn, basis levels should be firmer than usual at harvest. The prospects for an ample corn crop seem slim in light of planting delays and excessive heat in the summer of 2011. Fall basis levels are already reflecting a crop that is smaller than needed to meet normal usage. U.S. average basis levels for harvest delivery are trading about 20¢ higher than the previous year as a result of the tightness.
For soybeans, the conditions are reversed, with ample supplies and sluggish near-term demand leading fall basis levels to be 15¢ below par.
Historically, basis levels at harvest have been a good indicator of whether there will be upside potential in basis over the marketing season. A weaker-than-normal basis at harvest is a sign that supplies are ample, and it forces you to lock away your crop instead of delivering it to the cash market. Over the season, basis levels recover quickly as end users bid grain out of the hands of farmers.
Conversely, stronger-than-normal basis tends to hold relatively flat over the growing season and upside is limited by basis convergence on futures contracts.
With that guide from history, it would appear that this year may turn out to be good for storing soybeans on basis, but corn storage returns on basis may be limited. In other words, hedging or using an HTA contract that lets the basis float may turn into a good option for soybeans. That's not to say that locking a suitable carry through forward contracts isn't a good option as well.
From GeoGrain's data on 3,800 grain buyers around the country, the tables at left illustrate what opportunities currently exist to lock in a storage return for corn and soybeans based off of prices from October 2011.
On average, storage out to June (or 8 months) would improve the price by 31¢ for corn vs. 45¢ for soybeans. Obviously, there is a great deal of regional disparity, so you should research your own opportunities before making a decision.
Shop for best market
While locking in a forward price can sometimes be a valuable way to earn extra cents, at the same time doing so may restrict your opportunities throughout the year to capture local market opportunities.
Regional grain basis can be driven sharply higher or lower depending on the needs of local grain buyers and the abundance of grain in the local pipeline. Predicting when and where these opportunities will occur is difficult. But you can effectively monitor your local conditions to find these extremes and capture opportunities.
In some cases, you may find that selling to six or more grain buyers over the course of a marketing season will help you capture the most value.
To illustrate this point, my company, GeoGrain, assisted a farmer trying to market corn in east-central Iowa from November 2010 until the end of August 2011. Over this nine-month period and located in this area, he could have sold to nine different markets to maximize his net price adjusted for trucking and storage costs. The markets he found best to sell to were generally 20 to 60 miles from his farm.
Two points are important here. First, the fact that the best market opportunity changes numerous times over the course of a marketing year implies that local prices shift quite readily. Grain buyers have different competing needs for grain and, depending on grain availability, they may be willing to bid more than their competitors. You should constantly reassess your market area when looking to find the best grain opportunity, as conditions change from week to week.
Second, the farmer never found his best pricing opportunity at his closest market. Even once this farmer paid for the added cost of trucking to a distant market, he was able to achieve a better net price. On average, this farmer earned an extra 16¢ over his nearest market even after trucking costs.
“Over the season, basis levels recover quickly as end users bid grain out of the hands of farmers.”
With so much uncertainty regarding price direction in the coming year, look to factors that are directly within your control.
Managing basis levels for profitable storage and spotting trucking opportunities in your local area markets are two valuable ways to add cents to your bottom line.
Trucking Can Be the Ticket
Seasonality plays a big role in situations when the market pays to truck grain. When producers are planting and harvesting, the market often runs short of pipeline supplies. That's when the rewards occur, and farmers may need to consider commercial trucking to capture these opportunities.
“Trucking opportunities often occur without notice, and only last a limited time,” McNew says.
“Elevators loading trains, end-users scrambling to keep plants at full capacity, and bottlenecks in local grain movement are precipitating factors,” he adds. “Farmers need to keep up on what key regional players are paying.”
Farmers who rely on commercial trucking know that rates tend to change readily, depending on trucking lanes in a local area, McNew says.
“Trucks running a lot of fertilizer from a plant to farm suppliers may be looking for grain-hauling opportunities on dead bounce backs,” he says. “Stay in contact with truckers, or use load-posting boards. In some cases, finding cheap freight in one direction to a lower-priced market may outweigh hauling to a premium market with normal freight charges.”