No Profit at These Corn Basis Prices, Analyst Says
The 2017 summer is nearing its end, with August just about over and fall right around the corner. The 2017 crop year had a lot of possibilities, with drought threatening at one point in the western Corn Belt, and too much rain threatening other areas in the northeast Corn Belt. But as the season comes to a close, the weather scares turned out to be just that – scares! The weather has improved through the summer, with August perhaps the best month for the crop so far with corn and soybean yield potential improving during August (corn improving 3.2 bushels per acre, and soybeans 0.5 bushel per acre according to Pro Ag yield models). As we finish up the month of August, we have the highest yield estimates of the year for corn and soybeans.
Given, these are not record-shattering yields, either. In fact, they are both very near trend yields, which basically means that both are about average in yield potential. That’s average as in, not a crop failure, but not a bumper crop, either. Some areas are better than average, and some are worse than average, and some are near average. But over the whole country, we are very near an average crop in yield potential right now.
Weather has been most cooperative the past few months, ever since early July when the forecast turned from hot/dry to cool/dry, and then slowly more and more rain was added to the forecast until by mid- or late July, we had a cool and wet forecast. That improved things considerably, especially in the dry western Corn Belt, which actually was on the wet side in early August. Some areas got two to four times the normal rainfall the first two weeks of August, and that did a great deal of benefit to dry soils and crops in the western Corn Belt.
Now, the seven-day forecast remains considerably cooler for most of the Corn Belt, and that forecast continues in the eight- to 14-day forecast. That will cause some concern as we finish off the season for crop maturity — we will need a long fall for some crops to make maturity this fall. That is probably more important for corn than soybeans, but both crops obviously need some heat to finish off the year (or a late frost). Precipitation amounts are above normal for the southern half of the U.S. the coming week, with the Delta especially forecast to be wet over that period. But precipitation turns below normal for most of the eight- to 14-day forecast.
Crop conditions released yesterday, 8/21, were steady corn at 62% rated G/E, and improved 1% for soybeans to 60% rated G/E. For both crops, the Pro Ag yield model expanded, with corn up 1.3 bushels per acre to 170.9 bushels per acre, now above USDA’s 169.5-bushels-per-acre estimate. The soybean yield model expanded 0.25 bushel per acre to 46.9 bushels per acre, now the highest of this year (but still below USDA’s 49.4 bushels per acre estimate). The fact that both crops’ yield potential is expanding is a bearish sign as we finish out the month of August, as conditions have been quite good during this month for most of the U.S. (cool and relatively wet for the most part).
Crop maturity could be an issue, though, as corn is 76% dough stage (1% behind average), and is 29% dented (6% behind average). Soybeans are more on schedule, with 97% blooming (equal to average), and 87% podding (2% ahead of average). Cotton ratings are 63% G/E, up 2% this week and well above last year’s 47% rating. Sorghum improved 2% to 66% rated G/E, now even ahead of last year’s record-setting crop yield. HRS wheat conditions improved 1% to 34% G/E, with 58% of the crop harvested (7% ahead of average). It has been a bit of a struggle as it continues to rain about every three days in the eastern portion of HRS wheat country, so some of the quality may suffer a bit at the tail end of harvest. Oats are 78% harvested, 5% behind normal, while barley is 70% harvested, 12% ahead of normal.
Soil moisture levels are improving with all the recent rains, with topsoil moisture up 3% in adequate/surplus to 63% this week, and subsoil up 2% to 62% rated adequate/surplus this week. So soil moisture should be adequate in many areas to take us to crop maturity. Now we just need the temperatures to cooperate to allow the crops to make maturity, especially for corn. As long as temperatures are forecast below average, that might support the corn and soybean market until we can ensure that we reach crop maturity in northern areas.
The one constant this past year has been a much-worse-than-normal basis for most crops (corn, wheat, and soybeans). It has probably been the worst, though, in corn. I have not seen a year where basis has remained so poor for corn all year in the upper northwest Corn Belt. This is very disturbing for farmers, as a basis 30¢ to 50¢ worse than normal all year can cost a corn farmer virtually all of his profit. Essentially 50¢/$3.50 is 14%, and I can assure you there isn’t a 14% profit margin in corn today! Instead, the 14% or more that is subtracted off the cash corn price for many farmers due to the horrible basis is giving them a big loss raising corn.
If corn costs are $3.50 to $4 per bushel, and basis is 50¢ a bushel worse than normal, it makes it almost impossible to make a profit in corn. Even if you sold for an average of $4 December futures on every bushel, with a 50¢-worse-than-normal basis, you cannot sell for a profit all year long! For many producers today, the price is already well under $3, and a good share of it is the terrible basis. You just can’t give up 14% of the profit margin to basis loss (that much worse than normal); yet that is exactly what producers are doing right now. Without relief on the terrible corn basis, producers will eventually have no choice but to plant even less corn.
Ray Grabanski is president of Progressive Ag Marketing, Inc., the top-ranked marketing firm in the country the past eight years. See http://www.progressiveag.com for rankings.
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