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Roy Smith: Show the USDA data

Most of the attention this week has been on the January government report. Unfortunately, this column is being written before the report is released. It seems as if everyone has an opinion about what the report will show in terms of grain supplies until the next harvest. Instead of evaluating what my farm produced last year in relation to yield reports I have heard from farmers in other parts of the country, I look at other factors to form my judgment as to what the report today shows.

Two things jump out at me in terms of market action and price reaction. The local basis in comparison to Chicago futures is usually a good indicator of demand for the cash grain. It is normal to see a wide basis when Chicago prices are high, indicating that the high prices are reflecting speculative long positions instead of demand. In recent weeks, however, prices have been high relative to other years at this time, but the basis has been exceptionally strong.

In the soybean market, there is a premium for delivery next week. The country elevator basis here is 20 cents, a level almost unheard of in January. Looking back the last three years, soybean basis has ranged from 50 to 80 cents. Corn basis here at my local elevator in eastern Nebraska was zero for immediate delivery and positive for deferred contracts. I don't ever remember having a positive corn basis in January in Cass County. Terminal elevator basis for both corn and soybeans is positive. That is also very unusual.

Carry for both corn and soybeans is negative. That kind of spread in the futures market is usually an indicator of better prices ahead. That price pattern does not guarantee a rally in the futures. However, based on history the odds are good, with the caveat that there will be new crop soybeans coming on the world market when the South American harvest begins. For corn, though, the next big crop is still a half a year away. If this report shows a bullish surprise, there is a lot of time before the possibility of good yields changes the outlook.

You have probably guessed that my outlook for the report is bullish. The report will be history by the time you read this. Recent history shows volatile price action following the report. In some years, prices have been sharply higher and some years just the opposite. Reaction has not always been immediate. Psychology and outside markets play a big part in price direction. I have corn to sell from last year’s harvest. I am as concerned about the possibility of negative reaction to the report as you are. By the end of Friday, we will have a better idea of where prices are heading for spring.   

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