Urbana, Illinois
February 23, 2009
A combination of weak basis and
relatively low futures prices for the 2009 corn and soybean
crops are discouraging new crop sales, said a University of
Illinois Extension marketing specialist.
"Futures prices for both crops are also now below the
likely spring price guarantee for crop revenue insurance
products," said Darrel Good. "Aggressively pricing the 2009
crops at prices below the crop insurance guarantee may not be
prudent this early in the season."
Good's comments came as he reviewed corn and soybean basis risk.
For much of 2007 and 2008, corn and soybean basis levels in
Illinois and many other producing regions were unusually weak.
"Problems with lack of convergence of cash and futures prices at
delivery markets during periods of futures contract maturity
were widespread," he said. "Currently, basis levels are quite
strong in most markets and convergence appears likely as the
March 2009 futures contracts mature."
On Feb. 20, 2008, the average spot cash price of corn at
interior country elevators in central Illinois was 26-1/2 cents
under March 2008 futures. On Feb. 20 this year, the average spot
cash price in those same markets was reported at 11 cents under
March 2009 futures, a level that was typical for this time of
year prior to 2007.
Similarly, the average spot basis at Illinois River locations
north of Peoria was reported at minus 29 cents on Feb. 20, 2008
and minus one cent on Feb. 20 of this year. Basis at central
Illinois processing plants was reported at minus 10 cents and
minus seven cents on those two dates, respectively.
"The year-over-year change in the soybean basis has been even
more dramatic," said Good. "The average central Illinois spot
basis at interior country elevators was minus 58 cents on Feb.
20, 2008 and minus nine cents on Feb. 20, 2009.
"The average basis at Illinois River points north of Peoria was
minus 48 cents and plus nine cents on those two dates,
respectively. Finally, the average central Illinois processor
basis was minus 42 cents on Feb. 20 last year and plus 15 cents
on Feb. 20 this year."
A number of factors may be contributing to the much stronger
corn and soybean basis levels this year compared to last year,
he noted.
"Lower price levels reduce the cost of owning and storing crops,
and lower fuel prices reduce the cost of transportation," he
said. "A rapid pace of soybean exports and generally tight
holding of both corn and soybeans by producers as prices have
declined may also contribute to the strong basis.
"Improving operating margins for grain merchandisers, as the
financial pressure of buying and storing high-priced crops and
meeting margin calls on the short hedge positions have subsided,
may be another contributing factor."
Basis for harvest 2009 delivery of corn and soybeans remains
generally weak, averaging about minus 48 cents and minus 57
cents for corn and soybeans, respectively, in central Illinois
on Feb. 20 this year. Weaker new crop bids reflect the lack of
urgency to acquire new crop sales from producers and the
financial risk of short hedging of new crop purchases.
"The strong old crop basis may have marketing implications for
producers with unpriced inventory of 2008 crop corn and
soybeans," he said. "The strong soybean basis and relatively
small spread from March 2009 to July 2009 futures imply that the
soybean market is offering a very small premium for continuing
to store old crop soybeans.
"Improvement in basis over the next few months is unlikely to
cover the cost of storing the soybean crop, with interest costs
alone approaching about four cents per month. Under that
scenario, the only potential for a return to storage is through
higher futures prices. The soybean market, then, is encouraging
producers to sell old crop inventories."
Any speculation on higher prices could be accomplished through
the purchase of futures contracts or the use of basis contracts,
he added.
"Continuing negative general economic news, stabilization of the
South American crop and prospects for an increase in soybean
acreage in the United States in 2009 may make a price recovery
difficult, however, in the near term," he said.
The corn market shows a little more carry than the soybean
market, providing some prospects for a small return to storage
if basis remains strong. With reports of unusually large
inventories of farmer-owned corn, however, there is risk of a
weakening of the basis if farmer sales accelerate rapidly in
anticipation of another large crop in 2009.
"Prospects for the price level of old crop corn are not quite as
negative due to an acceleration of export sales, ongoing
increases in ethanol use of corn, and anticipation that the
March 31 USDA Prospective Plantings report will reveal
intentions to reduce, or at least not increase, corn acreage in
the United States in 2009," Good said.
By Bob Sampson, University of
Illinois |
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