Markets unPACKed: A Better Look at Basis
Better Look at Basis
After a busy week around the USDAWASDE report last week, the question looms as to whether corn and soybeans will remain supported at prices up here, or will we see a harvest dip?
Today, the ProFarmer Crop Tour kicks off as they break out to the West and the East: Ohio, Indiana, Illinois, and Eastern Iowa for the East, and Nebraska, Western Iowa, and Minnesota for the West. It is no secret that there has been a divide in crop conditions. Tours like this will start to paint the yield picture while keeping the latest USDA national yield estimate in mind.
The two things we are thinking about is basis and commercial selling. Right now, cash prices are currently above $5 for harvest delivery nearly everywhere, there is little incentive to forward sell, and we could see increased selling at harvest, leading to a price pullback. What we are curious about this week is if any increased commercial selling took place on the back of the report for those that felt they missed the higher prices in late spring. We are calling around to find out.
While we wait for some answers from the boots on the ground, we are keeping our eye on basis. The USDA Daily Ethanol Report on Friday, August 13, and Tuesday, August 16 demonstrate just how remarkable basis is.
Figure 1: Snapshot of Basis on August 13.
Figure 2: Snapshot of basis on August 16.
In fact, we are going to look to basis as the telltale sign to market direction coming into harvest. Basis at ethanol plants, typically higher than the basis offered by grain elevators and cooperatives, is trading solidly above $6/bu for current cash delivery; harvest basis is similarly high as well, in contrast to years prior. When it comes to individual cash markets determining what the local price should be, basis appears to be what is carrying local markets rather than futures. While local basis could continue to appreciate, high local basis often precedes larger futures price movements – giving us reason to be optimistic about cash and harvest delivery prices in the near term.
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