Jon Scheve with weekly market commentary made on August, 11 2023
The USDA report was neutral at best for corn. Yes, they lowered the corn yield, but demand decreased almost as much, leaving carryout at 2.2 billion bushels. Historically, when carryout has been over 2 billion, it has been too much corn for the market to handle.
Moving forward, the average yield may still change, but recent weather is indicating it may not shrink by much, and it may even increase.
Export pace is the corn market’s biggest issue, because it is not even close to meeting USDA estimates. A demand increase will be needed to keep prices from becoming overvalued. If the market does pull back, demand could increase.
Market Action – Setting Basis on My 2022 Corn Crop
As I have shared before, I have 100% storage capacity for my crop on my farm. Having this much storage helps with harvest logistics and allows me to maximize profitability from market carry and more basis opportunities.
Within 60 miles from my farm, there are 2 ethanol plants, 6 feed mills, and 4 rail shuttle loaders. Since I never know which location will have the best bid each year after harvest, HTA (Hedge To Arrive) contracts are never a profitable option. Usually, I can even get a premium to what my local markets are bidding, if I sell my corn picked up on the farm and let someone else haul it away, sometimes up to 500 miles. I get these premiums by being flexible, using futures to hedge and storing all my grain at home.
Even though I can store all my crop, I do not always do it. For instance, last summer it was extremely dry in our area, so our crops matured faster, and yields were lower than normal. Supply was also running low throughout the US, which forced futures and basis into an uncommon inverse market. Inverse markets for both futures or basis values are when the near-term values are higher than months further out in time. Since our corn was ahead in the growing cycle, we could sell our new crop against old crop demand at higher values. I sold +50 basis against the December futures picked up on the farm at the start of harvest, which is much better than the usual -40 values I tend to see at that time of year.
I would have sold all my corn at this basis value if I could, but the price being offered was only available day to day and other producers in a similar situation were trying to take advantage of it too. As more producers began to harvest, it put more pressure on the local basis market. In the end we only got this high basis value for our dryland corn that was harvested one month before our irrigated corn was ready, about 35% of our production. Once harvest was in full swing, basis near the farm pulled back to +25 picked up on the farm, so I stored my remaining corn thinking basis values would likely rebound higher in the spring.
I thought corn basis could trade as high as +75 picked up on the farm, based on the previous year’s values. However, I only had 10% of my total production sold on futures at harvest. The problem was, if I decided to set either my futures or basis, I increased my futures spread risk, since I didn’t know if the market would stay in an inverse or return to a much more common carry market. Basically, I was unsure what would ultimately increase grain movement – a basis increase, futures increase, or the spread widening.
If I set basis without selling futures first, and the market turned into a carry, where futures values are lower now compared to further out in time, then I would lose money rolling my basis values forward waiting to set futures values at hopefully higher values. However, if the inverse stayed, then setting futures first would be a mistake because rolling them forward in an inverse will cost money.
What Did You Do?
I thought the best decision was to do nothing since I already had 25% of my crop set on basis with no futures sold against them. I felt this was enough exposure to futures spread risk for my farm with what I knew at the time.
Futures had rallied into harvest, and upside potential in the spring still seemed possible based upon market responses in the previous two marketing years. Basis values also seemed to have upside potential, since it was down 25 cents since harvest began and 50 cents lower than the previous spring.
What Happened?
Basis increased after harvest. My local basis values increased to +50 picked up on the farm in mid-November, so +75 picked up seemed like a real possibility. I decided to hold out for the higher basis value because I had just set my bean basis for November and December shipping two days prior. While I can load both beans and corn at the same time, I prefer to avoid it because of cross contamination risk.
Unfortunately, basis topped out 5 days later at +60 picked up on my farm. I had to wait until April for values to hit +50 picked up on my farm again, where I set basis on another 15% of my production, picked up on the farm, against the May contract.
My Remaining 50%
I decided to hold my remaining 50% of grain until possibly late June when I thought basis values in my area would be at their highest level for the marketing year. My target goal was still +75 picked up. This seemed like a reasonable target price because the March 31st USDA report showed Nebraska had 30% less corn than the previous year. Plus, April through June is corn’s peak export season. Again, with no futures position sold on my corn, I thought flat price values for corn were likely to be steady or higher. In May there was a slight pull back in the basis, but I thought there was time for values to improve like they did the year before.
On the morning of June 1st, my industry connections notified me almost immediately that a large ethanol plant in the western corn belt had a major breakdown that would take several weeks to repair. Since I monitor dozens of local basis markets throughout the US, I knew the severity of this issue and how hard it would hit the basis market west of the Mississippi river. Hundreds of train cars would have to be diverted to other markets for several weeks. I thought that would likely crush the basis in my area.
Therefore, that morning I quickly made sales on my remaining 50% of corn and managed to get +43 against the July futures picked up on the farm. By the end of the day, basis was trading another 10 cents lower than the sale I made, and basis values would eventually fall nearly another $1 by the end of the month. In the end, my industry connections and knowledge of the basis markets allowed for quick action and prevented further basis price deterioration and helped my bottom line.
Final Basis Values Summarized
The following chart shows the best bids picked up on my farm from several different local end users (in green). The cost of freight to each location is subtracted from the posted bids to easily compare different basis markets in my area with those picked up on my farm. The red X’s show when I set my basis during the year picked up on my farm.
In hindsight the best basis value for my farm was to have set it last November. However, at the time information suggested more upside potential than downside risk. Overall, I am satisfied with my basis value outcome for the year on my corn. Next week I will talk about the spreads in the futures market and explain how setting a lower basis value in an inverse market can be more profitable than setting a higher basis value later in the marketing year.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com