We think the dawn of the biofuels age qualifies as a new “premise” for the corn market, but there are a lot of other factors that impact these numbers.
What will corn basis look like in the year to come? That question is likely far more widely discussed in the corn business, and rightfully so. But it is very important to corn users as well, especially as they develop or refine financial plans for the coming year. As with most questions, the trick lies in answering it!
The accompanying chart contains weekly basis data for Omaha cash corn. We realize there are as many basis series as buying or selling points for corn. And the basis at any two points may or may not behave the same because basis is an inherently local item driven by the availability of and demand for grain in a given area. We know we can’t even begin to provide descriptive stats for them all. The price of corn in Omaha is perhaps the most widely quoted in the country, though, so the basis it implies is, we think, instructive.
Because of the variation inherent in these series, both buyers and sellers usually use longer-term averages in computing expected prices or negotiating futures-based contracts. The black dashed line in the chart represents the average basis each week over the period from 2002 through 2011. As most of you know, using an average over time is fine and dandy until the basic premises of the market change, at which point one has to make a decision regarding the averages’ continuing applicability.
We think the dawn of the biofuels age qualifies as a new “premise” for the corn market. But, as can be seen in the differences between the lines for 2010 and 2012, even that has not had a uniform impact on basis levels. The truth is that there are a lot of other factors that impact these numbers.
The average basis over all weeks for the 10-year period was –20¢ (actually -.20.05¢) with an average maximum of +19¢ and an average minimum of –45¢, indicating a range of 64¢. Shorten that period to the last five years and, surprisingly, the average stays virtually the same at –19.51¢. But it gets more variable, you say. And that would be wrong since the average of the highs for the 2007-2011 period has been +1¢/bu. and the average of the lows has been –42¢ and, thus, a range of 43¢/bu.
But it still appears that corn basis levels have strengthened over the past two years, especially since mid-2011. Readers should consider that the basis spike in June and July of 2011 was driven by floods on the Missouri river and resulting difficulties in getting corn to Omaha usage points. But even omitting that spike leaves obviously stronger basis levels in the second half of 2011, and 2012 basis levels have been higher than the 10-year average every week except five so far in 2012. The 2012 across-week average is +29¢/bu. through December 14– a difference of 49¢/bu. from the average over 2002-2011.
So what should one use? It’s a judgment call for sure but we are inclined at present to use something like the average basis for 2011 and 2012. They reflect the current weather patterns and what we think is the stabilization of ethanol-processing capacity in the Midwest. Part of that capacity is idle at the moment, but it is still there and can be reopened quickly when economic conditions warrant.
Should corn acreage hit 99 million acres this year (as Informa Economics predicted this week) and weather conditions support a trend yield around 163 bu./acre, we could see the return of giant piles of corn in the Cornbelt, and a return to those 2001-2011 average basis levels. Maybe.
U.S. total corn usage averaged 8.36 billion bu./year the first three years of that 10-year period. It averaged 11.1 billion the last three years of the period – an increase of 33%. And the lion’s share of that increase occurred, quite logically, in corn surplus areas that once saw very weak basis levels. In the famous words of Inspector Clouseau: “Not any more.” (Sorry, there’s no way to write the screwy French accent.).
Even good weather will likely leave basis levels stronger than they once were.
Thoughts on drought
To paraphrase the Christmas ditty — “All I want for Christmas is a X-inch rain!” You can fill in the X with whatever number you want. Of course, it has to have one syllable to fit the song’s rhythm, but when moisture needs are this dire, who cares about rhythm?
The accompanying map shows the National Weather Service’s not-very-rosy outlook for drought conditions through the end of March. The only area with strong hopes is the Southeast. Any improvement in Missouri, Iowa and Minnesota will be welcome, but prospects for the West look pretty dismal. The Plains states will have to improve if feed prices are to moderate in 2013.
They will also have to improve if the beef cowherd is even to be maintained, much less expanded, in the new year.