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Market Commentary for 9/9/23 - Splitting Futures and Basis Sales

Jon Scheve with weekly market commentary made on September 8, 2023

Dry weather is contributing to declining water levels on the Mississippi River. This could make it difficult for US crops to remain competitive globally because it will drive up the cost to ship grain to the export houses.

The market continues to trade in a tight range while waiting for more crop conditions news. Crops under the most stress in key growing areas of the corn belt will be harvested first and will likely have poorer yields. Everyone wants to know how much better the later harvested crop yields will be, and if it will make up for the areas that suffered.

Splitting Futures and Basis Sales

Last week I shared where I set my cash sales compared with prices since harvest as seen in this chart:

This prompted a question from a farmer “What would have happened if I had sold cash corn at the top of the futures market on May 16th, 2022?”

On May 16th, 2022, December ’22 futures hit the high for the year at $7.69. However, on the same date the best basis bid available for harvest time picked up on my farm was at a historically normal value of -.47 against December futures. This would have made the cash price $7.12, which was only 8 cents better than my total cash corn average for the year.

The Argument AGAINST Making Cash Sales

Due to the drought, during harvest the basis value was +25 picked up on my farm. This ended up being over 70-cents higher than the basis bid for the same time frame five months prior. In other words, the highest futures market may not look as great when basis values for the same date are also considered.

Historically, futures and basis do not correlate well. They are two completely different markets buying and selling the same product. Basis is local and futures are global.

Basically, basis is the way local buyers can control the amount of grain flowing into their facilities. If buyers are getting more grain than they can use or sell, they will lower the basis value to slow the flow of grain. And if farmers are not selling fast enough to meet their needs, the buyers can raise basis values to incentivize grain movement to their facility.

That is why on any given day, it MIGHT be a good day to sell futures, or it MIGHT be a good day to set basis. However, it is almost never a good day to set both at the same time in a flat price cash corn sale in the market. The following chart compares futures to basis for the past two years during an inverse market. An inverse is when futures are higher in the nearby contract verses the contracts that trade further out in time.

  • The green line is the spot futures value.

  • The yellow line is a spot basis bid near my farm.

  • The blue vertical lines are when futures hit the high for the calendar year.

  • The red dotted line is when basis hit the top for the marketing year.

As the chart shows, futures and basis do not hit their highs at the same time.

To further illustrate this, the chart below shows futures compared to basis during carry markets from 2014 to 2019. A carry market is when the nearby futures contract is worth less than the futures contracts that come after.

Again, there is no correlation between basis and futures and they do not hit their highs together. The closest in time was about one month apart in 2016 and 2017, but even in those years basis bids still fluctuated at least 15 cents between the futures high and the basis high. During carry years, like 2014 to 2019, the best time to sell futures was before harvest in early summer when there was the most weather risk in the market. Then those future sales could be moved forward to the next summer to collect some market carry premium, and then basis could be set nearly a year after setting the futures value to achieve the best possible flat price outcome. Monitor the Basis To maximize profit potential for basis it is very important to monitor the local market closely and fully understand why basis is moving in the short-term and what kind of potential there is for the long-term. Basis can easily move 40 cents throughout a marketing year and during drought years it can move as much as $1 per bushel. Location Also Impacts Basis Basis moves more for those further away from the Illinois and Mississippi rivers, because of how the delivery process on the Chicago Board of Trade works. I will explain that process more in a future newsletter. This means there is usually less basis movement near the Mississippi River from Clinton, IA to St. Louis, MO and near the Illinois River from Chicago, IL to St Louis, MO. While there is less basis movement in these areas, it still usually shifts at least 20-cents throughout the marketing year. And as one gets further away from these major delivery point elevators, there is often even more than a 40-cent basis swing throughout the year. Bottomline Monitoring and working your local basis market could mean an additional 20 cents every year or more. For farmers raising 200 bushels per acre, that means at least an additional $40 per acre of profit. If the basis moves 40 cents, it could be as much as $80 per acre of additional profit added to the bottom line. And this is regardless of the futures value one sells.

Jon Scheve Superior Feed Ingredients, LLC

9358 Oak Ave Waconia, MN 55387

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