Basis talk

Agriculture.com Staff 11/16/2007 @ 9:08am

I spent some time this week with the grain buyers at my local elevator, to get their take on what is happening in the grain markets. I never ask for advice from them but it is always interesting to see a view from the perspective of the persons who are both buying and selling grain.

One of the factors I watch very closely at this time is cash soybean basis. I still have half of my 2007 crop to sell. Using the 'dead cat bounce' chart gives me guidelines in determining when to pull the trigger. It is common to have a 30-40 cent improvement in basis during and shortly after harvest. I compare the local cash bid to March futures, since sometimes the bounce runs into January before the rally runs its course.

All of the criteria have been met for a normal 'dead cat bounce' for the 2007 soybean crop. That includes basis improvement of 44 cents from October 1 through today. That number would look really good if the basis had not started at a disastrous negative $1.54. Still, with deferred futures over $11, the result is cash beans over $10 in many places. Here the top was $9.80 on Wednesday.

What caught my eye was basis improvement of ten cents from Friday until Tuesday. The individual at the elevator said that farmer selling had almost stopped in the last few days and that terminals were narrowing the basis to try to pull soybeans into the pipeline. Our local elevator bought almost double the normal amount of beans at harvest and many of those are in storage and hedged for future delivery. They do not care what the futures price does, but basis improvement will cause them to lift hedges and deliver the inventory to processors.

The individual I talked with pointed out that even after a 44 cents improvement in basis, the spread between cash and futures was still abnormally wide and that there is room for improvement. What really concerns me is that the past two days have seen the basis widen again by two and a half cents. In ordinary years, basis widening is a sign that the top is near. It shows that the true demand for soybeans is starting to diminish. Usually, the market does not turn immediately, but gives me a few days to see if basis improvement resumes.

It also concerns me that the psychology has turned so bullish. For a long time, farmers seemed focused on ten dollar beans. The futures market blew through the ten dollar level without slowing. Now the talk seems to be 12 dollars or higher. With 11 dollars on the screen for most months, many think the sky is the limit. It is easy for me to make the case for that to be true. Still, I look at charts for wheat, gold, gasoline and currencies and get a feeling that soybeans could follow. If that would happen it would be a disaster for those of us holding cash soybeans.

Unfortunately, the cash corn market has not followed the pattern established by soybeans. I would be interested in forward-pricing cash corn for next spring to take advantage of the carry, if I could get a good basis bid. My elevator man says that better basis will not come until the outside piles of corn are cleaned up. Our elevator has corn on the street in Elmwood. It is there mainly because they filled bins with soybeans that would have normally been filled with corn. This happened because the abnormally wide basis on soybeans offered more opportunity for the company to take advantage of potential basis improvement than offered in the corn market. Since our corn yields this year were not outstanding, beans went into the bins and corn went outside.

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