Soybean Basis Indicators

Q: What are indications the soybean basis will firm?

Basis will firm as demand increases and/or available supply decreases. What are the indications for both?

Soybean crush: NOPA soybean crush is reported every month on the 15th or the first business day after the 15th. The USDA reports total U.S. crush on the first business day of each month for the month that ended 30 days ago. Since more than half of U.S. soybeans are crushed, the rate of crush is a very important demand factor.   

Soybean exports: The U.S. exports about 41% of its soybeans. Weekly exports sales reports issued by USDA on Thursdays and weekly export inspections issued on Mondays. When it comes to basis, the inspections are more important than the sales because inspections are the amount of beans loaded on ships, trains, and trucks ready to leave the U.S. Sales are important for a longer-term outlook because they were purchased to be exported before the end of the marketing year. As we get closer to the end of the marketing year (31 August), sales of old crop beans do become a more valuable indicator of basis change.      

Changes in Open Interest: Every Friday, the Commodity Futures Trading Commission (CFTC) issues its Commitment of Traders Report (COT) which includes the changes of commercial traders (hedgers). When a merchandiser (a commercial trader) buys cash soybeans, he sells futures to hedge his price risk of the cash soybeans. When a commercial trader sells cash soybeans, he buys futures to liquidate his short (sold) position because the physical beans belong to someone else and he no longer has price risk in the cash market.

Every Sunday, our Weekly Basis Report, includes the changes of the commercials’ position. Last week, the commercials bought 86 million more bushels of soybeans than they sold. The previous week, commercials sold 162 million more bushels than they bought. If commercials sold more beans than they bought several consecutive weeks, one can expect they will need to become more aggressive buyers of beans soon.

How Merchandisers Attract More Bushels:

• Encourage farmers to deliver this month bushels contracted for delivery next month.

• Free DP or lower cost DP (The Andersons went to free DP about 10 days ago).

• Send farmers information that the futures price or basis will decline sharply in the coming days or weeks: We cannot get any barges (or trains or trucks) to ship grain and we are almost full! The railroad (or processing plant) employees are going on strike! The new crop production is going to be the biggest ever! The USDA (EPA, NOPA, etc.) is going to change rules that will reduce grain prices! China is going to quit buying American products! An importer has cancelled previous purchases! The dollar is going to get much stronger! Everybody is selling! 

• Lastly, firm their basis.

Use Common Sense: Is “everybody” you know selling soybeans? How long are the lines at the crush plants and elevators?  Call some grain haulers and ask them how busy they have been.  Ask your buddy at the coop when they are getting the next train (barges) in. Consider how are the crops looking nationwide and in your community? Are the livestock feeders losing money, making a little money, or making big money? We report the broiler egg set and hatch every Thursday. If you grow corn and beans, you should know the trend in broiler egg set as well as the monthly cattle on feed numbers and the quarterly pig crop numbers. Is the dollar weak or strong and what is the trend? If “everybody” thinks the dollar will continue lower, foreign buyers will buy hand to mouth, but as soon as they think the dollar will be in an extended uptrend, they will buy U.S. products and store them.    

The soybean basis may be supported by increased soybean oil demand because of the EPA’s biofuel proposal, seasonal reductions in farmer selling as old crop supplies get tight, potential weather risks in Argentina (too much rain), logistical constraints, Brazil’s soybean export facilities switching to corn, and possible weather problems in the U.S.

On the other hand, fear of lower prices could scare many farmers into dumping all remaining old crop. Lastly, pay attention to FOB prices of U.S. beans compared to Brazil and Argentina which we report every Monday.