Posted by: usset001 | August 15, 2013

The Corn Basis is Upside Down

corn clipWe have an interesting basis situation in Southern Minnesota; the corn basis for harvest delivery (15-35 cents under the December contract)  is stronger than the basis for delivery next spring and early summer (30-40 cents under the July contract). Normally, the basis at harvest is weaker than the basis for late spring or early summer delivery. The corn basis is upside down – a situation that has happened in just 4 other years since 1989.

Why? I think the reasons are as simple as a sharply lower corn price and a general reluctance to price grain for harvest delivery (the higher harvest basis), with an outlook for a larger corn crop and corn stocks that point to a softer buying basis next spring.

What does this mean for corn farmers? This is a gift for producers who used HTA contracts or sold futures contracts to price corn before harvest. Not only did you secure a higher price early, but you can finish it off by locking-in a very favorable basis. If, for example, you used an HTA contract to lock in a December futures price of $5.50/bu. in May, you can lock-in a basis of 25 cents under, securing a cash price of $5.25/bu. – much better than the current quotes closer to $4.50/bu.

An upside down basis also throws a monkey wrench into one of my favorite pricing tools – storing corn and selling the carry in the futures market. Positive carrying charges have returned to the corn market (deferred contracts are trading at a premium to the December contract). Selling the carry means storing grain and selling a deferred contract (the May’14 or Jul’14) at a price 18 or 26 cents higher, respectively, than the December contract. What makes this work is not just the carry in the market, but also an expected improvement in the basis. In a “normal” year (if there is such a thing), I would expect a basis of 50 cents under the Dec contract at harvest to improve to 35 cents under the July contract – I get to add 15 cents of basis improvement to the carry in the market. This is not a normal year, and an upside down basis makes selling the carry less appealing this year.

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