Corn basis and spreads are FIRM. Why?
Let’s recap basis and spreads quickly in layman’s terms.
Basis is the localized price differentiator buyers and sellers use relative to the referenced futures price. For corn, the reference price is Chicago.
A futures spread is the difference in value between two futures months. Futures spreads help adjust the flow of a commodity to meet the needs of the market. All things being equal, a tighter or narrower futures spread indicates a market with less supply relative to demand while a wider spread offering more “carry” indicates a more well supplied market relative to demand.
On September 2nd, BarCharts US corn basis index registered a low of -.3892 versus December and on November 22nd, the same index registered a high of -.2291 versus December.
Over this period, we saw a low in the Dec-Mar futures spread of 19.75 cents carry on August 20th and an orderly grind to where we are today on November 26th, testing 7.25 cents carry.
These highs were last traded back in June of 2023.
The carry from December to July futures traded from a low of 37.75 cents carry on the 12th of September to a high of 17.5 cents carry today [Figure 1]. This means a much smaller amount of the cost to carry is being covered. Why is that? Why is it that we are seeing basis continue to rally when the farmer was undersold, and the US farmer grew a “record” crop?
Figure 1. Dec - Jul Corn Spread
Here are a couple of potential WHYs
USDA Production Estimates
2023 production was a record – this year, USDA is projecting a record yield, not record production. USDA’s last estimate was a 4-month low in production estimates for 2024.
The Farmer Was Undersold
While many farmers were undersold before harvest, you might expect this to widen the basis as they were forced to sell. But that hasn’t been the case. Basis has actually firmed.
Increased Ethanol Production
Ethanol production has been running about 4 percent above 2023 levels through week 11 of 52.
Stronger Export Sales
U.S. export sales are up over 39 percent year-over-year through week 11, with shipments 38 percent higher.
Lower Corn Stocks-to-Use Projections
Both U.S. and global corn stocks-to-use projections are significantly lower than 2023 levels, even with cash prices being 40 cents lower.
The basis has firmed, and spreads have also strengthened, indicating that the market is demanding it now.
Conclusion. The firmness in spreads can be attributed to the basis trading close to or above delivery values along the river along the futures curve, which forces the convergence of futures and cash prices. Even with a record yield, domestic demand and export activity are pushing cash indicators to say something is amiss.
Garret Brown
Founder | Market Advisor
Having grown up on a farm, Garret respects the wide range of skills needed to run a successful operation and recognizes farmers are often stretched thin trying to do it all. This understanding, along with his affinity for markets, fuels his drive to make tough marketing decisions simpler for farmers.
Leveraging his experience in grain origination and margin management, Garret analyzes technical and fundamental market information. With the assistance of CODAK’s algorithmic signaling platform, he puts together buy/sell recommendations while working with the CODAK team to create strategies that accommodate each farmer’s personal risk tolerance, on-farm storage capacity, and break-evens.
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