Posted by: usset001 | May 22, 2012

I remain a corn basis bull

Pipestone, MN nearby corn basis

Over the past six months, old crop corn futures (Jul’12) have traded in a volatile way but without a clear trend – within a broad range of $5.80-6.80/bu. If you want to see a clear trend in the corn market, you have to focus on basis, which has marched steadily higher since harvest.

Nearby basis quotes of 10-25 cents over the July contract are common throughout the southern tier of Minnesota (I am hearing of even better basis numbers negotiated privately between elevators and farmers. If you have a substantial amount of corn – more than 5,000 bushels – and are in interested in selling, don’t shy away from making a few calls and seeking a better bid. It could be worth 10-20 cents per bushel). I have records for southern Minnesota location going back to 1990, and in that time we have never seen “overs” – a positive basis – in the month of May.

Don’t hear me wrong – “overs” in southern Minnesota have occurred before, just not this early. My records show the basis was most volatile in the summer of 1996, when it reached upwards of 100 cents over the Sep’96 contract in the months of July and August. Last year was another year for the books, when basis reached 30 cents over the Sep’11 contract in July and early August.

What do the summers of 1996, 2011 and 2012 have in common? I have records going back to 1950, and these years stand out as the three tightest corn carryout situations on record.

We have a substantial inverse in the futures market, with the old crop Jul’12 contract trading close to a $1/bu. premium to the new crop Dec’12 contract. Professor Reese Dahl taught a handful of axioms concerning basis, one of which was “Basis for grains is erratic in inverted markets.”

We are only in the third week of May and I remain a corn basis bull.

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