Size, quality of corn crop expected to affect basis

Feb 5, 2010

The average corn basis has firmed during the past week, while futures prices sunk to three-month lows. Needless to say, farmers have become tight-fisted with their corn and are reluctant to sell any of it at lower cash prices.

As long as corn futures prices continue to fall, basis levels are likely to improve. But the opposite is just as true. In the last couple of days, corn futures prices turned higher in what most analysts called a recovery bounce. Basically, the corn futures market was sold down until it hit a point where there were no more sellers. At that point, buyers, commercials and noncommercials (speculators), stepped back into the market and began buying back previous positions. This is called finding value. Traders are always trying to find that point where buyers and sellers are in balance. Basis levels so far are holding steady, but if futures prices continue to climb, basis levels will likely fall.

The issue with this year’s corn crop is that supplies are large and demand is not strong enough to keep basis levels firm. On top of that, the South American crop is expected to be huge, which will weigh on world supplies and further pressure demand, especially for U.S. exports. The large South American crop will most likely pressure the futures market, and maybe basis levels won’t fall off as much as anticipated. But with U.S. prices the highest in the world market, it’s not looking very promising.

Quality is another issue that will affect basis levels this crop year. This year’s crop was harvested at higher-than-normal moisture levels and had to be dried down for sale and storage, and in many cases, it wasn’t dried. A tremendous amount of corn is in outside piles and in storage bins at higherthan-usual moisture, both on and off the farm. In addition to high moisture, test weights are low, and stored grain is susceptible to kernel damage and excess foreign material. There are also several million bushels still in the fields that did not get harvested, especially in the northern Midwest, that have been hammered by winter storms.

As the days lengthen and temperatures start to warm, it is imperative that producers and elevators start moving the highest-risk corn into marketing channels. It doesn’t take long for corn to turn bad once temperatures warm, and for that reason, farmers will want to move poor-quality corn prior to planting. Otherwise, the longer they wait, the higher the risk that corn will go completely out of condition. It is important that anyone with stored corn keeps an eye on it and knows what to do should there be a problem. The worst-case scenario would be to have a bin full of high-moisture, low-testweight corn, with vomitoxin, that goes out of condition and has no value. No one wants to see that happen.

Many corn producers would like to capture the carry in the market and sell during the summer months. But with quality issues, time is not on your side. If there is as much poor-quality corn in the country as estimated, there will likely be a lot of corn moving into marketing channels by the end of March. Cash grain movement could be so large that it would clog transportation and put more corn in the market than can reasonably be handled. Basis levels would be pressured, and with added discounts for quality issues, cash prices could get ugly fast.

As more poor-quality corn comes to market, it would not be startling to see adjustments in basis levels for No. 2 yellow corn that would allow a premium for quality while discounts for lowquality corn increase. Reports from country elevators across the Corn Belt already indicate some substantial charges for high-moisture corn, including drying costs, light test weights, damage and foreign material. A lot will depend on the final destination of the corn, the type of buyer—a feeder or processor, for example—and how the corn will be used. Depending on where futures prices are at the time, it would not be surprising to see some net cash prices fall below loan value.

Those with good-quality corn that can be easily stored will get opportunities to take advantage of basis premiums or later delivery. — Bob Bailey, DTN