Editorial

THE COMSTOCK REPORT
Copyright 2006 @ CommStock Investments, Inc. - David Kruse

Not only did soybean prices climb over $10/bushel in 2004, but basis levels in Northern Iowa/Southern Minnesota soared from 50 cents under Chicago to spot premiums of $2/bushel premium Chicago futures as the regional supply shortage climaxed. Several new soybean crush plants were built in the region just before soybean supply shrunk and the result was bull markets both in Chicago and locally in basis levels. When at the recent Wisconsin Corn/Soybean Producers convention, a farmer with a million bushels storage told me that he no longer accepts a basis from buyers, but sets his own basis. He said he was getting his price as buyers were paying it.

A 752 million bushel USDA corn carryover is pipeline supply. Existing supply will not be located precisely or conveniently to existing demand. Basis levels are going to have to move some supply around from where it is to where it’s needed. Similar to new soybean crush plants becoming operational in southern MN in 2004 disrupting traditional basis levels, the ethanol industry, with a new plant coming on line every few days this year will re-define the basis in many areas. Commercial grain buyers will attempt to buy grain at traditional basis levels that farmers have been used to hoping they haven’t figured out that leverage has shifted to farmers.

Farmers may like the price of corn in Chicago but they may like their local basis even better. Every time that a farmer forward prices grain to an enduser for delivery, he locks in a basis, eliminating his ability to profit from local demand. Endusers are coming up with all kinds of different schemes from building grain bins, to subsidizing the cost of a call option to gain control of physical inventory. When farmers surrender control of physical inventory it weakens the basis. Personally, I’m not in a mood to accept a basis right now. Local basis levels for corn here in NW Iowa could just as easily move from a discount to Chicago prices to a premium just as they did in soybeans in 2004.

Endusers have to gain physical control of a commodity and that is proving more and more difficult for them to accomplish. Many existing ethanol plants are expanding their on site grain storage having become uncomfortable with their ability to source grain during lengthy periods of time, forcing them to expand storage in defense. They can gain price protection by buying Chicago futures but hogs don’t eat paper nor can a written agreement be crushed and distilled into ethanol. The past two years when corn was plentiful, there was virtually none for sale at harvest. Elevators bought corn locally but wouldn’t sell it locally. They had better markets for corn then selling to livestock producers at traditional out charges.

Physical control of grain has gotten valuable and that value becomes evident in basis levels. Some farmers like that WI corn producer have figured that out. Farmers need to price their basis just like they do their grain. Even if they can lock up price protection in Chicago they have more to gain by waiting to accept a basis. Local corn basis levels are now 35 cents under Chicago futures. I believe we’ll see the local price of corn trade premium to Chicago at times in the near future which is when producers should then make physical cash sales.

Endusers have to buy corn, not just when they see a price they like, (that’s not likely going to happen). They have to buy corn when it’s available. We recognized this, which is why we recommended endusers buy corn last August when farmers were cleaning bins for the next harvest. There was more corn available for sale than at harvest. Endusers will have to buy corn whenever they can get it. I believe a lot of endusers may have locked up some price protection by buying futures or options in Chicago, but are still going to be caught between a rock and hard place, acquiring the physical inventory. They may have hedged their price risk in Chicago but not their basis risk.

CBOT delivery points are too few and far away. The demand for corn growing regionally due to the ethanol industry should improve the traditional 50 cents under at harvest, 20-30 cents under summer basis levels typically seen in the WCB, as quickly as farmers realize the leverage they’ve gained in the marketplace from control of physical inventory. Endusers still have to convert futures price protection to actual commodity control and they don’t have that accomplished yet. That’s why they are coming with all the schemes offering incentives to get farmers to commit bushels to them.

Farmers should ignore these offers. They wouldn’t be coming at them if endusers had any market leverage. They benefit endusers, not producers. I believe producers have a very small risk in the basis, with plenty of buyers available, eliminating any need to commit to one. Endusers are trying to sucker farmers into assuming their basis risk.

Some grain buyers offer no basis established contracts. While this does allow producers to take advantage of basis improvement, any commitment of grain to endusers undermines the endusers incentive to improve the basis. It is the commitment of physical grain that they want and will go to extremes to get it. Farmers should take full advantage of the basis leverage.DK

Mr. Kruse is also president of AgriVantage Crop Insurance and Brazil Iowa Farms, an investor owned farming operation in Bahia, Brazil.(Futures Trading involves risk. Past performance is not indicative of future performance.) For information on subscribing to the daily CommStock Report, contact:

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