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Miles to money

11/17/2011 @ 11:10am

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.

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