December 31, 2007
Cash-Basis reversal seen as threat to soy rally
A sudden reversal in basis is generating market murmurs hinting that a huge rally in cash soy prices may be coming to a close, just as calendar year 2007 does.
"The canary just stopped singing," said one Ohio soy merchandiser, comparing a recent turn in basis to the age-old practice of placing a tiny caged bird in deep-sunk mine shafts to warn of gathering concentrations of toxic gas.
National average cash soy prices have exploded during 2007. They have risen more than US$5 per bushel since the first of the year and nearly US$2.00 between Thanksgiving and Christmas alone - a period in which huge futures gains were also accompanied by a rise of some 6 cents in average domestic basis.
Basis is defined as the amount - denominated in cents per bushel - by which a local cash price stands above or below futures for a specified delivery month. Unlike the futures price, which reflects national and international supply-and-demand relationships, basis reflects local supply and demand conditions and is often viewed as an underlying barometer of the health of any given futures trend.
CBOT soy futures surged to fresh 34-year highs Wednesday, extending a rally which began in May and accelerated sharply this fall, following harvest of a 19 percent smaller, 2.59 billion-bushel crop.
"The January soy futures contract closed at US$12.20 3/4," said analyst John Roach. "This was the highest closing price ever for a nearby soy futures contract. It eclipsed the previous record set on June 4, 1973."
The all-time intraday high was US$12.90/bu, set on June 5, 1973.
But in the meantime, domestic soy basis has weakened by an average of about 3 cents this week, with CIF export basis also dropping 4-5 cents since Friday at ports in the Louisiana Gulf and Pacific Northwest.
"Bean basis levels show signs of weakness," said Walsh Trading analyst Marty Colgan. "I hear a lot of beans moved (Wednesday) on the (40-cent) rally."
Daily soy receipts at select Midwestern terminals surveyed by the CBOT rose 67 percent Thursday, as several major market advisory services actively recommended additional sales by producers with supplies still in storage.
"Unless a dire South American weather pattern unfurls, the soy and corn market should be nearing a top," said the AgResource Co. "Most producers are looking to reward the rally in the new tax year with cash sales."
Although movement of soy from farm-to-market has already begun to accelerate, some experts warn that virtual soy tsunami may be poised to flood the supply pipeline with the turning of a new calendar page.
"Old-crop bids face a triple-whammy ... one, they are already at the second highest levels in history ... two, farmer-selling is expected to pick up after the first of the year, as many have delayed their normal fall selling to defer income into 2008," said Doane Agricultural Services. "Farmers often need a big surge in cash-flow to cover March 1 land payments and cash rents for the 2008 season."
March CBOT soy futures have also fallen by an average of about 20 cents per bushel during the past three years, which would only add to the pressure placed on farm gate prices by deteriorating basis.
Steve Freed, vice president of ADM Investor Services, told attendees to this month's NGFA Country Elevator Conference in Chicago that he recently returned from a producer meeting in Nebraska, "where farmers told me they still had 70 percent of their beans to sell ... there should be some wild farmer selling after the new year, and then basis plunges ... I see a lot of volatility in soy basis."
Basis could be poised to mount some dramatic gyrations, as well.
"With futures at these unprecedented levels, basis can also do things that we've never seen basis do before," warned Mark Ditsch, an analyst with LaSalle Group/Rosenthal Collins analyst at the recent NGFA meeting.
National cash soy prices currently average US$11.36 1/4, indicating a median net basis 76 1/4 cents under January CBOT futures contracts.
