Producers
who want to forward price the 2009 or 2010 soybean crops may
have to sell futures directly, said
a University of
Illinois Extension marketing specialist.
"High
prices for these crops entice producers to do some forward
pricing, while the weak basis and margin risk of hedging
discourage forward pricing," said Darrel Good.
Good noted that some grain buyers have taken steps to limit
futures margin exposure by limiting new hedged-to-arrive
(HTA) contracts for producers to the current marketing year
and by not offering flat price bids beyond the 2008-09
marketing year. Reduced availability of HTAs and flat price
contracts transfer some of the margin risk of forward
pricing to the producer.
The sharp run-up in cash and futures prices of soybeans
since the harvest of the 2007 crop has at least partially
diverted attention from an underlying issue of extremely
weak basis, Good observed. While basis levels have
strengthened marginally, since harvest they remain very weak
by historic standards.
The average cash price of soybeans in central Illinois was
85 cents to 90 cents under March 2008 futures at harvest
time in 2007. On Jan. 17, the average price was still 72
cents under March futures. In northern Illinois, the March
basis only strengthened from about minus-$1.05 at harvest
time to minus-86 cents on Jan. 17. In southern Illinois, the
average March basis strengthened from about minus-$1 at
harvest to minus-61 cents on Jan. 17.
"The continuation of a weak basis means that short hedges
have not earned a return to storage since harvest,
particularly in northern and central Illinois," said Good.
"The strengthening of the basis has not covered the cost of
owning and storing the crop.
"Conversely, long hedgers have been favorably impacted by
the weak basis that has resulted in lower-than-expected
buying prices for cash soybeans. Those who only buy or sell
in the spot cash market have probably not been impacted by
the weak basis. In theory, the cash price reflects fair
market value for the commodity so traders in the cash market
are receiving or paying what soybeans are worth."
The weak interior basis has been attributed to a combination
of factors. These include higher transportation costs,
higher storage and ownership costs associated with interest
cost on high-priced soybeans, and a shortage of storage
capacity at harvest time.
"Only about 65 million bushels of storage capacity were
added in Illinois in 2007, while combined
supplies--production plus Sept. 1 stocks--of corn and
soybeans in Illinois were up about 250 million bushels in
2007," Good said. "A shortage of storage capacity, however,
is not an issue at this time of year."
The issue of weak soybean basis appears to be broader than
just increased transportation and storage costs and an
increase in demand for storage space, he added.
"The broader problem is revealed by the lack of convergence
of cash and futures prices of soybeans at the futures
delivery markets as futures contracts mature," said Good.
"Theory suggests that the opportunity to deliver and take
delivery of soybeans--warehouse receipts or shipping
certificates--at contract maturity should ensure that cash
and futures prices come together at maturity of the futures.
"Historically, soybean contracts have generally performed
well relative to that performance criterion. However, lack
of convergence has been an issue since early 2006,
continuing through the maturity of the January 2008
contract."
Basis levels at delivery markets were especially weak at
maturity of the July and September 2007 contracts. At
maturity of the January 2008 contract, basis at the Illinois
River was still about minus-55 cents.
"The lack of convergence in cash and futures prices at
soybean delivery markets implies that delivery mechanism is
failing to some extent," said Good. "Persistence of futures
prices above cash value at maturity may indicate that the
extremely large speculative activity in the futures markets
is holding futures prices artificially high and that the
delivery mechanism is not robust enough to force convergence
of cash and futures prices.
"If this is the case, weak interior basis and issues with
convergence may persist for the foreseeable future."
Cash bids for harvest delivery of the 2008 soybean crop, for
example, reveal a continuation of weak soybean basis. On
Jan. 18, average cash bids for harvest delivery ranged from
about 70 cents under November 2008 futures in central and
southern Illinois to 84 cents under in northern Illinois.
"Bids are 30 cents to 40 cents weaker than experienced at
this time of year over the previous four years," he said.
"Part of the weakness in new crop basis reflects the
industry's response to increased basis risk that unfolded
over the past year. Some of the weakness may also reflect
the extreme margin risk associated with hedging soybeans.
"Aggressive new crop selling by producers has apparently
created large short futures positions for some buyers,
resulting in large futures margin requirements as November
2008 futures have increased nearly $4 per bushel since the
fall of 2007. Large margin requirements increase the
interest cost of hedging and weak basis bids may help offset
some of that increased cost."