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Kub's Den
Thursday, July 18, 2019 2:15PM CDT
By Elaine Kub
DTN Contributing Analyst

Here's a story about averages, to illustrate the dangers of using this statistical tool:

Two pheasant hunters were walking through the prairie and flushed a big rooster. The first hunter took a shot but his pellets all flew five feet too far to the right. The second hunter also took a shot, but his pellets all went five feet too far to the left. Then, the statistically dead pheasant flew off out of sight.

Grain basis values are kind of like that -- resistant to averaging, or not capable of being averaged together in any meaningful way. Basis, by definition, is only ever local. It's the price of a commodity at a specific location during a specific timeframe, given in reference to a benchmark futures contract's price. For instance, on Tuesday, an ethanol plant in Cedar Rapids, Iowa, was bidding 14 cents over the September corn futures contract to buy corn for delivery to that ethanol plant during the last half of July 2019. Meanwhile, livestock feeders in Texas and exporters in New Orleans were bidding 55 cents over the September for corn. And some local elevators in the far western reaches of North Dakota were bidding 85 cents under the September futures price. Smoosh all those numbers together and you get quite a mishmash.

And yet, the basis market in one location does affect neighboring locations. If poultry feeders in the Southeast, for instance, start to pay higher prices for corn, then barge loaders in the Midwest may feel competitive pressure to also raise their bids and get their hands on more bushels. One local elevator may have to boost its bids to compete with those from the elevator 20 miles down the road, and so on and so forth. All the basis bids in a region, or ultimately across the nation, should be related to each other through these competitive forces. The DTN National Corn Index (NCI), a collection of more than 3,300 individual corn bids collected every afternoon by DTN and listed on the Minneapolis Grain Exchange, allows us to examine this overall trend from one day to the next.

On Tuesday, the NCI was $4.33 per bushel and the nearby September futures contract closed at $4.35; therefore, the average basis bid was only 2 cents under futures. Compare that to the more typical national average basis we saw back at the start of this summer when it was 27 cents under the nearby futures contract on June 3.

It starts to make one think of other hot basis summers, notably the summer of 2013, when corn basis bids had a panicky peak on July 22, with the NCI ($6.80) actually $1.39 over the September futures contract ($5.41). But let's not forget the summers of 2011 and 2012, too, when national average cash corn prices spent about a month of each summer surging above the benchmark futures prices. The basis peak in 2011 occurred on July 29 at 23 cents over futures (NCI at $6.89; September futures at $6.66). The nearby basis peak in 2012 occurred earlier, in late June, at a somewhat indefinite average bid because most grain buyers were frantically trying to roll their futures hedges out of the July contract and into the September contract. However, if I had to put a number on it, I'd say the national average basis on June 29, 2012 was 27 cents over the September (NCI at $6.55; September futures at $6.28).

Note that those years aren't included in the chart accompanying this column. For one thing, they're off the scale. For another thing, the problems with averaging basis bids across a nation became especially compounded when not every bidder was operating off the same futures contract (July or September) and the spread between contracts was entirely schizophrenic while the market tried to decide whether September futures represented old-crop or new-crop corn during a drought and subsequent short-supply years.*

Meanwhile, our sense that this is the time of year for strong basis bids should be rewarded. With July sun on your skin, you start to think of traditional summer things, like the taste of the first tomatoes out of the garden, afternoons at the lake, and hot summer basis bids. When should we expect peak basis fervor?

First, let's think about why it's so hot right now in the first place. One theory: Corn end users (ethanol producers, livestock feeders, foreign buyers, etc.) may have noted a shortage in production expectations more dire than USDA's supply and demand tables currently suggest, and they're feeling anxious. Commercial grain companies, similarly, may have made obligations to fill trains or otherwise deliver grain this upcoming fall and winter, and they're now mightily concerned that they may not get enough new crop corn in 2019 to fulfill those obligations. Therefore, the hot basis bids this summer may be an attempt to buy in as much old crop corn as possible to fill waiting bin space. Recall from the latest Grain Stocks report (June 28) that farmers have held on to more corn than usual this year. As of June 1, there were still 2.95 billion bushels of corn stored on-farm, up 7% from a year ago. The competition for those bushels will continue until the grain actually starts to move and those empty commercial bins start to feel more comfortably full.

However, so long as the futures markets continue to act like we're in a world of 91.7 million planted acres and $4.30 corn, farmers may continue to shun even the suddenly generous basis bids of this summer. Farmers ultimately receive a check based on a flat price (not a basis price alone), and make their marketing decisions accordingly.

In that way, maybe the on-farm old-crop bushels are a bit like the pheasant in my opening story. One buyer can take a shot with 63 cents over; another buyer can take a shot with 65 cents under, but as long as the ultimate result is still a flat cash price under $5.00, those bushels still aren't in the bag.

*If, despite the disclaimers, you still want to see what a chart like that would look like -- comparing 2019 so far to the nationwide corn basis values observed in those wild summers of 2011, 2012, and 2013 -- you can find a companion chart on my Twitter feed: https://mobile.twitter.com/…

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BE/SK)


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