January 24, 2012
As cash-rich farmers hold tight to their crops waiting for higher prices while export demand picks up, US cash markets for corn are on fire this month spiking "basis" bids to levels not seen in four decades, grain traders and analysts said.
From Blair, Nebraska, to Eddyville, Iowa, to Decatur, Illinois, corn basis bids are as much as US$0.40 a bushel higher than in January 2011, or about four times the levels seen a year ago.
"Basis" is the term used in cash grain transactions to denote the number of cents per bushel above or below the futures price that the local grain elevator, processor or exporter is bidding. It reflects the fact that most commercial grain deals are "hedged" in the CME futures, with buyers and sellers taking an opposite position from their cash market obligation and thus insuring against adverse price moves. Grain buyers and traders say they are focusing on Illinois, the No. two corn and soy state following Iowa, where basis bids are at record highs for late January.
"We have never seen cash bids over futures for the third week in January which we are seeing now," said University of Illinois economist Darrel Good, who has tracked 38 years of weekly USDA prices for country Illinois markets. "For the third week in January, about five under futures was the strongest we've ever been. That was back in January of 1991. We're at a penny over futures," said Good referring to last week's east central Illinois cash basis.
Lack of farmer selling has been a key factor. Many farmers usually hold off sales of grain in December until the new tax year starts in January, which traditionally depresses cash prices as a flood of grain from the fall harvest is trucked to grain dumps at elevators. But farmers in the Midwest Corn Belt, flush with record earnings in recent years, are sitting tight.
"You've got a perfect storm where the farmer is not selling, you've got boats showing up at the Gulf, you've got the corn processor still wanting corn, and the ethanol guys still making enough money to be out there bidding too. A lot of people are starting to wonder where the inventories are," said Mike Hall, president of MLH Futures, an Illinois commodity brokerage specialising in cash grain markets.
US cash basis markets have been hot all year as ethanol producers, livestock feeders and food processors fight for a tight supply of corn. Grain buyers saw a surge in corn demand by ethanol makers in the last quarter of 2011 as they pushed production hard to capture the government's blenders tax credit before it expired on January 1. Now, corn stocks held by farmers and grain companies on December 1 are at a five-year low at 9.6 billion bushels, despite weak feed and export use in the fourth quarter, with farmers holding two-thirds of the supply at home, according to USDA.
"Decatur is paying US$0.30 over for corn. A year ago they were 12 under and the five-year average for this date in Decatur is eight under," Hall said. "It's pretty pricey. It makes you sit back and say if you have these kind of premiums at this time of the year, what kind of premiums are we going to look at in May, June, July, especially if China shows up for corn."
A break in CBOT futures prices to US$5.92-1/2 a bushel last week, down US$1 from early autumn, keeps farmer sales for January lighter than usual but sparked a flurry of foreign buying. South Korea alone has booked a million tonnes of feed grain since January 5, traders say.
"That has exacerbated the firmness in the cash market and the drying up of CIF barges in corn, the inversion in the CIF cash market," said Rich Feltes, vice president of commodity research for brokerage RJ O'Brien, referring to export values.
"The farmer had a couple years of pretty high prices. He has gotten use to these high prices and literally brainwashed with the short global food story, the food inflation story and China is running out of food story," Feltes said. "As prices turned down, especially given his very cash rich situation evidenced by the way farmland has doubled in five years, he is in a position to sit and hold when he doesn't like the price," he added.
CME nearby futures markets are building in premium to the deferred months, suggesting farmers should sell crops now, analysts say.
"I think they are in for a rude awakening if weather normalizes in 2012 and we get more corn acres," Feltes said. "The basis and the spreads in this kind of situation are going to the carry the bulk of the work in trying to draw this corn out from farmer hands and not necessarily the board."