Posted by: usset001 | March 14, 2011

Large disparities in the spring wheat basis

The wheat values in Crookston reflect bids currently offered by many elevators in the Red River Valley

The current market for hard red spring wheat in the Red River Valley is offering a textbook example of the impact of transportation costs and available on basis. I want to discuss the situation but, first, let’s look at a few numbers.

This morning I logged onto CashGrainBids.com to review the nearby corn and soybean basis in 25 markets around Jackson, MN (south central Minnesota). I learned that the nearby corn basis currently ranges from a low of 50 cents under the May contract to 37 cents under. I also learned that the nearby soybeans basis ranges from 62-69 cents under the May contract, except for the local soybean plant (bidding 46 cents under). My sense for the basis in southern Minnesota tells me that ranges of this magnitude are normal.

Now we look at the nearby basis for 14% protein HRS wheat in 25 markets around Grand Forks, ND. The poorest quote is 45 cents under the Minneapolis May contract. The best quote is 85 cents over the May contract. Neither extreme represents a lone outlier – there are several elevators bidding 85 over, several bidding 45 under, and many other bids scattered between extremes. So we have a southern Minnesota spot basis for corn with a 13 cent range from best to worst, while the range for HRS wheat is 130 cents, or 10 times greater.

What’s going on with the spring wheat basis?

It’s a transportation issue. Elevators that have access to rail cars for shipping wheat have access to a very strong nearby wheat basis – these are the firms that can afford to bid 85 cents over for wheat. The nearby rail basis quoted at the Minneapolis Grain Exchange for 14% protein HRS wheat is 290 cents over the May contract (that’s the low end of the range and, keeping with the quirks of the Minneapolis market, it reflects a “delivered Chicago for beyond” value). It costs about 80-100 cents per bushel to ship wheat by rail from the Red River Valley to Chicago. Even at 85 cents over for a nearby bid, the elevators with rail cars will enjoy a healthy handling margin.

Elevators who do not have rail cars and are uncertain when they will get rail cars, are bidding a very low price. They can’t afford to lean on an inflated nearby basis – it may be substantially lower when they finally have the rail cars to ship wheat.

The railroads are doing great, or awful, depending on how you want to look at their current situation. On the one hand, rail business is booming and much better than anticipated a year ago. On the other hand, the railroads were not prepared for booming demand. Throw in a severe winter which further reduced capacity, and the result is some very poor rail service throughout the Northern Plains. The situation has resulted in some very serious problems for PNW exporters who have ships waiting for loads but the grain needed to fill them still trying to find its way west on a rail system struggling to keep up.

The severe winter also helps to explain why the nearby wheat basis is so high. Flour mills are anticipating a disruption in rail service when spring floods strike. (That’s right – as bad as rail service is today, it is about to get worse. There is one major rail yard in St. Paul that will most likely shut down for 2-3 weeks once the floods begin.) Mill buyers are doing what buyer must do – assuring an adequate stock of milling wheat to carry them through the flooding period. Mill buyers live by two rules. Rule #1: Never (I repeat, never!) run the mill out of wheat. Rule #2: If a storm shuts down roads, or a strike shuts down the rail system, or wheat quality is a problem, refer back to Rule #1 for guidance.

I hope you have your own truck for shipping wheat. If you are anywhere in the Red River Valley, the good basis bids are not very far away.


Responses

  1. Ed,
    What do you think about a spread: long WK11, short CK11?

    The spread is down to 28 cents.


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