Weekly Basis 03/05/2022

The Dow Jones Industrial Average settled at 33,614.80, down 443.95 points for the week.

Crude oil was at $115.05 late Friday, up $22.97 for the week.

The dollar index is at 98.52, up 1.97 for the week.

May (K) corn settled at $7.54¼, up 98½ cents for the week.

Dayton, Ohio Cargill is paying $7.21 for corn, 33 under the May futures, which is 18 cents weaker basis than a week ago. Their fall delivery basis is steady at 30 under the December futures.

Poet at Iowa Falls is paying $7.26 for corn, 28 under the May futures, which is 23 cents weaker basis than a week ago. Their fall 2022 delivery basis is steady at 30 under the December futures.

The March to July corn carry went from -15½ to -35¼ this week. This why merchandisers went to pricing cash corn off the July.

The CFTC’s Commitment of Traders Report (COT) is issued every Friday afternoon. It reports open interest as of the close of business the previous Tuesday.

The big spec funds added 7,070 contracts to their corn position to bring them net long 293,763 contracts of corn. The index funds cut 1,026 contracts to their long position to leave them net long 444,009 contracts of corn.

Corn open interest increased by 30,408 contracts to 1,977,728 contracts.

Eastern Corn Belt ethanol crush margin is $2.20 today compared to $1.36 last week and $1.55 a year ago. The price of corn subtracted from the value of processed products = ethanol crush margin.

May (K) soybeans settled at $16.60½, up 76 cents for the week.

Sidney, Ohio Cargill is paying $16.33 for beans, even with the May (K) futures, which is 7 cents firmer basis than a week ago. Their fall delivery basis is 25 under the November, which steady with last week.

Iowa Falls Cargill is paying $15.33 for beans, $1.00 under the May (K) futures, which is 20 cents weaker than a week ago. Their fall delivery basis is steady at 35 under the November.

The big spec funds cut 4,863 contracts from their position to leave them net long 139,999 contracts of beans. The index funds cut 3,202 contracts from their position to leave them net long 189,461 contracts of beans.

Soybean open interest decreased by 29,625 contracts to 1,007,315 contracts.

The March to July soybean carry went from -17 to -43¼ cents this week.

The soybean crush margin is $3.39 today, compared to $3.98 last week and $1.78 a year ago. Crush margin = value of the oil and meal extracted from a bushel of beans minus the cost of a bushel of beans.

CBOT July soft red winter wheat was up $3.25¼ this week to settle at $11.75¼. The local elevator is paying $10.23 for new crop wheat, $1.52 under the July wheat which is a $1.17 weaker basis than a week ago. King Milling in Lowell, Michigan is paying $9.67, $2.08 under the July for new crop, which is $1.95 weaker basis than a week ago.

The big spec funds cut 9,028 contracts from their soft red winter wheat (CBOT) position to leave them net short 31,298 contracts. The index funds added 4,140 contracts to their position to bring them net long 149,824 contracts of wheat.

Soft red winter wheat open interest increased by 36,374 contracts to 508,287 contracts.

KC July wheat was up $2.93¼ to settle at $11.74½.

The big spec funds added 4,164 contracts to their hard red winter wheat position to bring them net long 21,161 contracts. The index funds cut 689 contracts from their position to leave them net long 57,669 contracts of hard red winter wheat.

Hard red winter (KC) wheat open interest increased by 208 contracts to 234,174 contracts.

September (U) 2022 spring wheat was up $1.41¼ this week to settle at $10.63.

The Baltic Dry Bulk Index settled at 2,104, down 83 points for the week.

What you should have noticed:

Crude oil, corn, wheat and beans all had the biggest one week gains in a long, long time despite the dollar index being sharply higher. It is not supposed to work that way, but that is exactly what happens during times of inflation.

The carry for both corn and beans went ridiculously deeper into negative return to storage. On Thursday, merchandisers told farmers they went to July or September to price cash grain purchases, but they did not tell you they are hedging the May. Why would they do that?

They make money storing grain, but storing grain presently has a big negative return with this inverted market. So, they are letting farmers eat the negative carry and they will collect negative carry by selling May futures and buying cash grain from famers on the July. In other words, they know that May will lose more or gain less than the July in the coming two months because cash price and futures price comes together as the delivery month approaches. Instead of capturing the carry like they normally do, the merchandisers are capturing the inverse. You can do the same; buy July and sell May.

Of course, the merchandisers say they are using July or September futures to price cash grain because it is less volatile. July contract will be less volatile than May, but that is not the reason they said they are pricing off the July. The May will come down harder and faster than the July and they will capture the correction of the inverted market. Of course merchandisers will say I don’t know what I am talking about. Show me your hedge book.

It is amazing that the corn basis improved in both Ohio and Iowa after May corn gained nearly a dollar this week. Many farmers were told by merchandisers there is way more corn on the farm than previously thought and that is why many merchandisers dropped the basis 60 to 80 cents Thursday. Clearly, those merchandisers who weakened the basis sharply do not need the corn now. After all, the line of trucks waiting to unload across the Corn Belt Wednesday and Thursday was a half mile long. The reason the basis dropped so drastically by some merchandisers was they did not want to buy more corn because they would have to hedge it in the futures and, right now, they do not want any more hedge margin call risk.

Think about it: Cargill and Poet firmed their corn basis even though corn futures were up 98 cents this week. Who knows more about cash corn supply and demand than Poet and Cargill? Not me, not you and not your local corn merchandiser you talk to.

Even more amazing than a firmer corn basis this week is the ethanol crush margin improved 84 cents a bushel despite May corn up 98 cents! The soybean crush lost 59 cents per bushel, but it is still nearly double what it was a year ago... not so bad.

Last week, I reported the changes in the commercial traders’ position was a monumental liquidation. The numbers for the week ending Tuesday February 22 were:

Corn 63,739 total, liquidated 5 times more longs than shorts

Soybeans 43,252 total, liquidated 2 times more longs than shorts

SRWW 12,670 total, liquidated 10 times more longs than short

HRWW 134 total, about a wash

I reminded readers that a commercial trader hedges his cash grain position. That means when he buys cash grain, he sells futures (adds short futures position to hedge his market risk).

And when a commercial sells cash grain, be buys those short positions back.

Then I asked: What does the above information tell you about commercials’ change in inventory of physical grain for the week ending February 22nd?

If you figured out the merchandisers sold five times more corn than they bought, sold twice as many beans as they bought and sold ten times more wheat than they bought, then you had a pretty good idea this week would be an up week for futures prices.

It was not a fluke that wheat was much stronger than corn and beans. Nor was it a fluke that corn was stronger than beans. I say again, pay attention at the changes in open interest to help get a handle on where the physical grain is going.

And one last thing: do you suppose the negative return to storage had anything to do with why merchandisers were selling more than they bought two weeks ago?