November 7, 2022
BASIS LEVEL IMPORTANT FOR GRAIN MARKETING DECISIONS
On any given day, farm operators and others can get grain price quotes from the CME Group, also known as the Chicago Board of Trade (CBOT), in “real-time” on their computer or I-phone. Almost as quickly, they can get current and future corn and soybean market price quotes from local grain elevators, ethanol plants, and processing plants. The difference between the local grain price and the CBOT price is known as “basis”. Understanding how basis works and the seasonal trends associated with basis can be an important factor in making corn and soybean marketing decisions.
More specifically, “basis” is the difference between the local grain price quote on a specific date and the CBOT price for the corresponding futures contract month. Local harvest price quotes for corn and soybeans would typically correspond to the December CBOT corn futures price and the November CBOT soybean futures price. By comparison, storing the corn or soybeans after harvest and selling the grain via a forward contract in June or early July the following Summer would have the basis level correspond to the July CBOT corn or soybean futures.
A “narrow” or “tighter” basis means that the local corn or soybean price is getting closer or above the corresponding CBOT price, while a “wide” or “widening” basis reflects local grain prices that have a greater margin below the CBOT prices. In many years up until recently, farmers in the Upper Midwest dealt with “negative” basis levels, which means than local corn and soybean prices are lower than the corresponding CBOT prices. Areas near the Mississippi River ports or in the Southern U.S more typically have “positive” basis levels, where local grain prices are higher than CBOT prices. However, there have been several areas of the Upper Midwest that have had “positive” basis levels for corn and soybeans at certain times during 2021 and 2022.
While the definition of “basis” may seem quite simple, the dynamics of understanding basis can be quite complex. Basis is variable at different locations and can vary throughout the year, or suddenly be adjusted due to changing dynamics in grain market fundamentals. Following are the main factors that affect basis and can lead to changes in basis levels:
- Geographic Variations— Corn and soybean basis can vary greatly from location-to-location, largely dependent on the amount of the local grain production to be used as livestock feed or for use in processing and ethanol production. Therefore, basis levels tend to be wider in Western Minnesota and the Dakota’s than in Southern Minnesota, which has a high amount of livestock production, as well as several ethanol plants and soybean processing plants.
- Transportation Costs — This is the cost of shipping grain from the point of local sale to the final destination point, whether it be for use within the S. or transported to the ports to be shipped for exports to other countries. For example, areas that utilize a large percentage of the corn and soybean production in the local area have less grain to be transported to the ports or to other portions of the U.S. will typically have a tighter basis level. In addition, being closer to the Mississippi River, an important port, or a major rail line tends to reduce transportation costs and result in tighter basis levels, bot not in all instances.
- Supply and Demand — The overall U.S. grain supply, based on crop production for a given year and grain carryover levels from the previous year, along with the grain usage for livestock feed, processing, ethanol production, and exports, can result in year-to-year variations in basis For example, the 2021 and 2022 corn and soybean basis levels in many areas have been tighter than normal due to the strong demand for exports to China and increased domestic demand for livestock feed and processing. Poor crop yields in a local area can also affect basis in a given year. Local areas that had below average corn yields in either 2021 or 2022 have had a “positive basis” at certain times for corn and soybeans, due to strong local corn demand for feed usage and ethanol production, as well as demand at soybean processing plants.
- Storage and Interest Costs — In a normal year, both CBOT corn and soybean futures prices and cash prices tend to be the lowest at harvest time and then increase by the following Summer. As the time gets closer to the actual date of delivery for the grain, depending on demand, the local grain prices may be stronger than the CBOT prices, resulting in tighter basis The basis situation in the Upper Midwest in 2021 and 2022 has been different than normal due to a combination of lower-than-expected crop yields, together with strong demand for corn and soybeans. The rapidly increasing interest rates in recent months has resulted in a much higher cost of storing grain until next Summer, which encourages farmers to sell the grain in the next few months in order to take advantage of the current tighter basis levels.
There is currently a wide range in harvest-time corn basis levels the Midwest, depending on 2022 corn yields and demand for corn usage. For example, in portions on Nebraska and Kansas that were impacted by the drought in 2022, the early November corn basis level is +$.50 to +$1.50 above the nearby CBOT December corn futures price, which is a much different pattern than normal. By comparison, corn basis levels in areas of Southern Illinois are ($.50) to ($1.00) per bushel below December CBOT price, which is a much wider basis level than normal, resulting from reduced barge traffic on the lower Mississippi River due to low water levels. The national average corn basis level on November 3 was +$.05 per bushel above the CBOT December futures price.
The corn basis level on November 3 in Southern Minnesota ranged from about ($.25) per bushel under the CBOT December futures price to +$.15 above the CBOT price. Soybean basis levels in Southern Minnesota on November 3 generally ranged from ($.15) under to +$.05 over the CBOT January futures price, with some soybean processing plants as high as +$.40 above the futures price. In the six years (2015-2020) prior to 2021, early November corn basis levels in Southern Minnesota had typically averaged ($.35) to ($.45) per bushel below the nearby CBOT futures price and soybean basis levels were ($.40) to ($.90) per bushel under futures prices.
Currently, many farmers are quite “bullish” about grain market prices in 2023, meaning that they feel there is a good chance of corn and soybean prices rising in the coming months. The current basis levels for both crops in many areas are encouraging producers to sell their grain in the next few months, rather than waiting until next Summer to market the grain. Corn futures and cash prices are currently projected to stay fairly steady from now until July of 2023, meaning there is very little difference in the expected basis levels by next Summer. At soybean processing plants in Southern Minnesota, the soybean basis was +$.40 per bushel on November 3, compared to minus ($.15) per bushel in July of 2023, so even though the CBOT futures price for July is $.16 per bushel higher than the January price, the cash soybean bid for July is ($.39) per bushel lower than the current cash bid.
There are several grain marketing tools available for farmers to utilize besides cash sales, including a variety of hedging, options and basis contracts, Typical hedging or options contracts lock in the CBOT futures price but not the cash price, meaning that there is still basis risk. For example, a “hedge-to-arrive” contract locks in a CBOT futures price but the basis is not finalized until the futures contract is cleared and the grain is sold. By comparison, a basis contract locks in the basis but keeps the final price open depending on changes in the corresponding CBOT futures price and actual cash price at the time of delivery. Depending on an individual’s willingness to assume some market risk, they could also sell the grain for cash to realize the advantage of the current basis levels and take a CBOT options or futures price position to keep some upside potential in the corn and soybean markets.
Most grain marketing strategies, including storing unpriced grain in a bin on the farm, involve some level of price and/or basis risk. Understanding the dynamics of basis in corn and soybean market prices is a key element in analyzing the various types of grain marketing contracts that are available to farm operators. Iowa State University has some good information available on understanding basis and various grain marketing strategies. This information is available on the “Ag Decision Maker” website at: https://www.extension.iastate.edu/agdm/
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President,
MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960)