One way to define "basis" is as a "flow meter." A flow meter helps to regulate the movement of grain by balancing supply and demand. If there's a lot of supply, and demand is small, the basis weakens. On the other hand, if the farmer goes to the field and quits hauling grain to town (i.e. a low supply) yet, a large demand exists, the basis can strengthen.
In the grain market, supply and demand factors have signaled that the flow meter needs to change. Since February, the state’s nearby corn basis has lost 25 cents due to this shift in supply and demand. The market is telling us it doesn’t need corn TODAY as the front-end basis has gotten pummeled.
The global market is in a state of disruption and its easy to put our heads in the sand and say "I’ll deal with my grain sales later." We'd recommend asking yourself two questions today to help plan in this time of uncertainty.
- Is my on-farm stored grain going to go out of condition in the next 60 days? If yes, it might be difficult but let’s make a plan right away to deal with it. If your grain is in good shape, you have a little more time over which to get a marketing program in place.
- Do I need cash flow before June 1st? Sept 1st? Or can I hang on to my quality, stored grain? This needs to be factored into your marketing plan. Waiting until Aug. 31st to make a plan for Sept. 1st need is not an ideal situation.
Today's market disruption is not going to "fix" itself overnight. There are likely implications to the grain market still coming that we don’t even know about. Your best bet is to create a plan to manage your risk. If you don’t have a plan and then wake up on Aug 1st with corn out of condition and you have to dump it into the market, neither one of us has been successful.
We've Seen This Before
While COVID-19 does not kill livestock, we have another disease we can refer to on how a spreading disease impacted the soybean markets. African swine fever has stabilized in China and we're starting to see herds slowly increase. With it, the demand base for soybeans is slowing starting to increase. In my opinion, we're on a slow trend upward out of that problem.
What we've seen in the last 30 days is that gasoline consumption is down 65% as compared to February. Everything in our economy is interconnected. As gasoline demand drops, refiners have to find a place to store either oil or ethanol. As a result, ethanol is backing up and plants are reducing their grind; some would report by up to 35%.
What is the single biggest factor impacting basis today?
This means the amount of corn available has not changed. But, demand for that corn is down significantly. In round numbers, Iowa produces 2.5 billion bushels of corn and 2 billion is consumed by ethanol and livestock annually. What we're experiencing is ethanol consumption is down, exports are slow, yet the supply of corn is flat and ready to increase. Corn is normally consumed at the rate of 166 million bushels per month. With corn demand down, your corn basis again acts as the flow meter. With big(ger) supply and lower demand, the flow meter changes and the basis goes down.
While these are local impacts, your Landus Cooperative grain merchandising team is talking to end-users across the country, including out of state ethanol producers and exporters. We are hearing rumbling of a 2019 crop Market Facilitation Program but haven't yet received details.
We can talk about basis all day long, but the takeaway is to talk to your Grain Marketing Adviser and have a plan. We will get through this, together.