TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty

12/6/19

KEEP AN EYE ON BASIS

Corn futures have struggled the last six weeks, losing near 30 cents. However, basis levels have remained firm or even improved. Some are experiencing cash prices that have remained mostly unchanged, despite futures dropping. Typically, basis levels are weakest in the fall, as supplies are most adequate. Farmers who couldn’t store their corn were sellers as they harvest, or at a minimum, delivering on forward contracts, keeping plenty of supply available to buyers. This year is different.

It’s typical that most corn is harvested from late September through early November. With a third of the crop planted after June 1 and roughly 10% of the crop yet to be harvested as of December 1, there isn’t the normal flow of grain to the marketplace as in a typical year. Add to that a slow dry down due to high moisture levels prolonging harvest, and you have tighter-than-anticipated supplies. As a consequence, firmer cash bids have developed, as end users source their needs. In the futures market, manage money (large traders) is net short, suggesting little concern for harvest delays. The big picture suggests cumulative supplies for the year ahead, and this may be considered adequate.

As a producer, be sure to monitor basis levels, particularly when they are offered at historically good value. If futures prices rally, the odds are that high basis levels could erode. Consider basis contracts. These lock the basis price, not a cash price. If you choose to sell, you lock in a basis and cash price. In this case, you may want to consider retaining ownership. You could do this through the use of call options or by purchasing futures. You will have eliminated the cost of storage and basis risk, yet be able to capture upside price appreciation. With futures, you are subject to the market risk and margin calls. A call option is considered a fixed risk position, which is the premium paid (plus commissions and fees).

If you have questions on cash marketing strategies or would like ideas for your operation, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.