Where are you in your marketing plan? Did you sell out in August at the market highs? Do you still have your entire old crop either in the bin or the elevator? Did you sell your corn to shift the aflatoxin problem to someone else? Did you sell your beans because you only store corn? If you still have grain to sell and don’t like the drop in the futures price, what is there to do but continue to pay storage? Well, there is something, and you might want to strike while the iron is hot.
What determines the price of your grain? The price is a function of the futures market and the cash market, so there is a futures component and a cash component and the difference between the two is the basis. Subtract the cash from the futures price and you have the basis, which is likely a negative number, unless your local processor, ethanol plant, or feed lot is in need of grain. At that point it might be a positive number.
Iowa State University economist Steven Johnson makes the observation that a series of factors has pushed the cash price higher while the futures prices is declining, consequently anyone with grain to sell should be watching the basis quite closely. Both the corn and soybean basis are unusually tight and taking advantage of that fact can be beneficial in completing your marketing plan for the 2012 crop.
There are four independent dynamics that Johnson identifies which are pushing and pulling on the cash market to cause the basis to be where it is.
- Corn and bean futures have declined. When the futures prices decline there is less interest by producers in wanting to sell into a down market. Consequently, when futures prices decline, cash prices typically rise because end users need to acquire the physical commodity.
- US ending stocks are tight. With a small carryout end users know that bushels are being rationed and it may be difficult to acquire needed stocks. Consequently, cash prices will rise in an effort to acquire just enough stocks to satisfy the immediate demand.
- Good demand. Both processors and exporters are seeing increased demand so they are also bidding up the cash price to obtain the physical commodity.
- Lack of farmer selling. This is the end of the year, and producers don’t want to have the current calendar year reflect revenue from the 2011 crop as well as some of the 2012 crop. So your locks have rusted shut on the bin doors and the key will not be found until after the first of the new year.