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Strong basis a rare bird

07/15/2011 @ 1:31pm

Eastern Nebraska is home to two endangered species, the Least Tern and Piping Plover. These birds nest on the sand bars of the Platte and Missouri Rivers. Whenever there is a flooding problem, the talk quickly turns to what part the habitat of the two birds might play in the government’s management of the river. This year, especially, there is a lot of conversation because of the extreme flooding that has been taking place. 

Today, there is a situation in the grain markets that is more rare than the endangered Terns and Plovers. It is a current bid in the cash corn market that is higher than the Chicago futures contract price.  The cash bid at my local elevator is 12 cents over September futures.  That contrasts to the bid last October 15 which was 75 cents under nearby Chicago futures. 

In my June newsletter, I suggested that the conditions were setting up for a squeeze when September futures get into delivery. The current basis move indicates that traders are thinking cash supplies might get tight enough that it will be difficult for holders of short positions to find corn to deliver against their contracts. Consequently there is a rush to acquire supplies of cash corn. The result is that cash prices have risen faster than futures prices. 

A positive basis for corn at eastern Nebraska country elevators is a rare bird indeed! It is difficult to know when the good times might end. Odds are very good that the current basis situation will not last until harvest. Supplies of corn coming to town from the field will cause basis to slip even if futures prices rise.  

With delivery on September futures still six weeks away, there is a lot of time for volatility in the markets. The crop has already survived late planting over much of the Corn Belt. It has already survived flooding in the lower Mississippi valley. Likewise, it is now suffering from flooding in the Missouri valley. Today, the factors moving the market seem to be green snap from recent storms and the possibility of extended heat causing pollination problems. 

Those who are holding 2010 corn have the opportunity to sell it for over seven dollars again. How much higher it will go is anyone’s guess. We are into a psychological market environment with a lot of dollars at stake. The long term seasonal charts do little good in this situation. I am holding the last 10 percent of my old crop corn against my normal market rules. At this point, I have not yet set a target to make the last sale. It is probably not prudent to hold through another government report. This is a situation where a strategy of setting a flat price and placing an order with your merchandiser makes a lot of sense.  

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