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Farmers reluctant to sell corn into strong basis market

Basis levels in the eastern Corn Belt remain unusually favorable.

DES MOINES, Iowa -- The local cash basis market is holding up, especially in the eastern Corn Belt, at a time of the year when it isn’t strong.

However, farmers are reluctant to sell or not willing to sell enough of what the end users need, according to market experts.

Greg Lumsden, product line leader, Cargill MarketGuide, agrees that there are multiple factors holding up the basis market.

“The U.S. Southeastern feeding market is hot,” Lumsden says. “Plus, last year’s corn quality is poor in the eastern Corn Belt (ECB), and maybe the crop wasn’t there in the first place. Ethanol production was being ratcheted up, thinking China would buy. However, that now is fading a bit, as margins are not great.”

As of Wednesday, the local basis corn prices in the eastern Corn Belt (ECB) remain stronger than in the western Corn Belt (WCB).

For March delivery, here is a look at statewide average basis levels in the WCB, according to cmdty Newswires:

  • Iowa’s average is -17¢ under Chicago futures prices at $3.67 per bushel.
  • Nebraska’s average is -20¢ under Chicago at $3.64.
  • Minnesota’s average is -24¢ under Chicago at $3.60.
  • South Dakota’s average is -21¢ under Chicago at $3.64.

In the ECB, Wednesday’s average statewide corn cash basis prices, for March delivery, are as follows:

  • Ohio’s average is +20¢ over Chicago at $4.05.
  • Indiana’s average is +75¢ over at $4.59.
  • Wisconsin’s average is  -19¢ under Chicago.
  • Two separate Illinois locations reported basis prices over the Chicago futures market, as of Tuesday. In central Illinois, basis is +2¢ over Chicago, no price reported. In Decatur, Illinois, a basis of 15¢ over Chicago, with no price reported.

For December delivery, the WCB corn basis levels range from 17¢ under at a Missouri ethanol plant to South Dakota’s statewide average of -47¢ under, according to cmdty Newswires. Iowa and Nebraska’s statewide averages are -36¢ and -46¢ under, respectively.

End users Bid Up For Supply

Scott Irwin, University of Illinois agricultural economist, says that the cash basis market shows that end users are not getting enough supply.

“It's hard to say whether farmers are selling or not. But, what we can say with certainty is that whatever they are doing, they are not doing enough to satisfy the market’s demands for grain right now,” Irwin told Agriculture.com.

Because the basis prices in the ECB are either at even or positive at country locations, the question becomes whether the corn supply is not there or is it because of unusually tight and persistent holding by farmers, he says.

“As economists, we can observe the facts of a strong Southeastern feeding market, supply issues, etc. But the real question about how long this strong cash basis market will last has to do with whether it’s supported by stubborn farmer-selling. I think it relates more to supply-and-demand issues,” Irwin says.
Irwin added, “The feed demand is stronger than the market anticipated at the beginning of the marketing year. That is certainly what the USDA’s Dec. 1 stocks estimate indicated.”

In its January 10 report, the USDA pegged the Dec. 1 corn stocks estimate for 2020/2021 at 11.389 billion bushels and feed/residual use of 5.275 billion bushels, up 250 million bushels vs. the USDA’s previous estimate.

“This is a phenomenal feed/residual use that I thought the market overly discounted. And it’s showing up in the basis market right and left,” Irwin says.

The ag economist says that the demand side of this strong basis market story includes ethanol use.

“Just because crude oil production is falling doesn’t mean lower ethanol grind. E10 is a constant fraction of gasoline use. I think there are some bad economics applied to forecasting corn-based ethanol grind,” Irwin says.

Supply Side

There is even more support for this strong corn basis market when the U.S. supply is considered.

“Almost 8% of the U.S. 2019 corn production is still tied up in the field,” Irwin says. “And who knows how much of that crop will end up making it to the market.”

Irwin added, “But an even bigger supply issue, in the eastern Corn Belt anyway, are the massive crop quality problems. Low test weight, low quality, lower than No. 2 rated corn.”  

Farmers are reluctant to sell corn, Lumsden says.

“As the farmers hold off, waiting for $4.00 corn, this has kept the local basis market supported. Longer term, basis will be driven by futures which depend on China and production. The soybean crush margins are good everywhere, and grain for feeding will remain strong. If China comes for corn, along with seasonal export demand, futures can begin to do more of the work. Otherwise, rallies will find selling, and the rest will depend on crop expectations this summer,” Lumsden says.

Basis Market Excitement

The cash market is flat as a pancake, and the futures market is not moving anywhere except lower.

“All of the adjustment is in the basis market,” Irwin says. “Where we sell our corn from our farm in west-central Iowa, the cash price has been at $3.62 for days and between $3.55 and $3.65 for a long time,” Irwin says.

The futures market is influenced by the expectation of huge 2020 U.S. corn acreage, Irwin says. “And the cash market is saying that we don’t have enough right now, no matter what we plant this spring.”

In the corn market, we have all of the hallmarks of a short-crop with a long market tail. This pattern usually comes after a drought, but not this one.

This short-crop characteristic has more to do with the widespread problems on quality, Irwin says.

“Due to late planting in 2019, early freeze, drydown problems. Farmers tried to store wet corn with low test weight. And the market has to deal with an underestimated feed demand. So, add all of those together, and you have a price profile that mirrors a short-crop,” Irwin says.

What Kills Basis Strength

Assuming that we have normal planting weather and realize the large corn acreage, that would kill the cash and basis markets, Irwin says.

The reality is that 16.0-million-prevent-plant acreage from last year has to find a home this spring.

Rewarding The Market

Lumsden is telling his farmer-customers that if quality is a concern, reward the basis market.

“Move your grain and take that risk off the table. Otherwise, selectively take advantage of basis spikes to secure good levels in the months you will deliver. If adequately positioned, be patient on futures and wait for rallies due to potential China demand, a pickup in exports, or inclement weather as we head into spring,” Lumsden says.

Bryan Doherty, Total Farm Marketing by Stewart-Peterson, told a group of farmers at this week’s Iowa Power Farming Show that the unusually strong basis is sending mixed signals to the market.

“Normally, a strong basis market is reflective of either tight supply or strong demand, or both. But as we look at the USDA’s crop production numbers they have published, the basis strength doesn’t make sense. We shouldn’t have a U.S. corn yield average of 168 bushels and a really strong basis market. So, are farmers holding or hoarding corn? Perhaps. The cash market has to come up and pull it out of their hands,” Doherty says.

Doherty says that farmers should keep in mind that when the market tips over, things can fall hard.

“We’re telling customers that basis has a tendency to disappear, in particular, as you get further and further away from the harvest season. And, if futures prices rally, basis usually doesn’t follow. Monitor the calendar: We're at the end of January, not November. If you need to move inventory, especially if it’s poor quality, sell it and reown the crop on paper through a futures contract,” Doherty says.

Buyers To Pull WCB Corn East

Lumsden sees buyers in the ECB having to make unusual purchases of WCB corn.

“Yes, poor quality is an issue. Better quality corn will need to be pulled from Nebraska, which will also feel a pull from the Pacific Northwest. Minnesota corn suppliers can fill that demand gap somewhat, but they will likely come up short,” he says.

Earlier this month, the U.S. Grains Council released its annual 2019 Corn Harvest Quality Report.

In summary, the average aggregate quality of the representative samples tested for the U.S. Grains Council 2019/2020 Corn Harvest Quality Report (2019/2020 Harvest Report) was better than the grade factor requirements for U.S. No. 1 grade corn, indicating an abundant amount of good-quality corn is entering the marketing channel from the 2019 U.S. crop, according to the U.S. Grains Council.

The report also showed that 54.6% of the samples met the grade factor requirements for U.S. No. 1 grade, and 81.7% met the grade factor requirements for U.S. No. 2 corn.

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