As I have mentioned before, a good portion of my career was spent as a merchandiser, managing the space and all of the physical trading for an elevator with five separate locations. I feel having this cash grain background and still spending time each day trading cash grain for the growers I represent gives me and other cash traders a bit of a unique perspective when it comes to analysis.
I often say trading physical grain is messy because there are so many things you must take into consideration when it comes to turning bushels into cash. Of course, while as a merchandiser basis and spreads are the biggest focus, since they are where the margin is made, to be a successful merchandiser one must not only be able to trade into the current market structure, they must also be able to anticipate other developments that will influence the values they are able to trade later in the marketing year, to know when maximum opportunity may be presenting itself.
What is Basis and Why Does it Matter?
While spreads are a part of the combination making up margin for a hedger, basis is where the bulk of focus lies as it determines the true value of those bushels at any given time. For those of you who are unfamiliar, basis is the difference between where futures are trading and what the cash value is for the bushels traded. Basis is a function of local supply and demand, acting as a brake or accelerator for grain movement, improving or worsening the cash value paid for bushels as traders assess their needs and whether they believe it will be harder or easier to source bushels in any given timeframe going forward.
Basis tends to have a greater influence on farmer movement or the lack thereof, with it working to incentivize selling in times of poor futures prices by improving the flat price offered, but also working to take away futures gains eventually when the pipeline is full, and the bushels are no longer needed, at least for the moment.
True hedgers or merchandisers—whichever you choose to call them—tend to have a solid understanding of historical basis levels paid in their local market, not only in contrast to where values are currently trading, but also in respect for where they expect them to head. A good merchandiser has a good feel for local grain demand, supply availability and what it will take to get the bushels moving, a great merchandiser can do this across a whole host of market structures.
What is great about really getting deep into the cash market is understanding that while there are an impossible number of factors influencing the value traded at the futures market level, there are even more developments influencing the cash values paid at any given time in any given location. As a grain buyer for an end user, whether that be a feeder, an exporter, or a crusher/ethanol plant, running out of supply is the absolute worst thing you can do. Of course, coming in at a very close second on the list of the worst things you can do as a buyer is paying too much for the bushels you bought.
The negotiation that comes with trading cash grain is my favorite part, because basis is its own living breathing market, made up of reality—the grain that is moving currently into the pipeline in contrast to nearby needs—and a whole host of opinions on how the pipeline will remain supplied throughout the season ahead.
When it comes to assessing the market, and making a projection of what may trade, as well as the opportunities that may present themselves down the road, logistics play a role in this as well. As a merchandiser, you absolutely can’t sell what you are unable to move, but you absolutely must sell what you can’t hold—understanding how you are positioned and how the market is positioned when it comes to moving bushels through the pipeline is also vital in assessing where values head next.
So why am I telling you this? Because I feel understanding what drives the underlying factors influencing cash values can give us a better feel for what happens next in the market when it comes to sentiment and subsequent futures price direction.
What is Basis Doing?
Basis values are backing off nearly everywhere around the world currently—something you do not necessarily want to see if you are rooting for a significant rally in futures. This weakening of values will allow market bears to proclaim the rally capped, and they may not be wrong about this, at least in the short term.
The weakening of values though should not come as a surprise, as we have seen a significant pop in the flat prices paid to many farmers across the Corn Belt. While not indicative of every market structure across the country, a good portion of the nation’s corn farmers this past week were looking at cash prices nearly a dollar higher than the values seen just ahead of harvest when we neared futures lows.
While values paid are an important part of the decision-making process when it comes to turning bushels into cash, sometimes simply running out of time plays a role as well, and that is what we are starting to see in soybeans. From a seasonal standpoint, the flow of grain should increase, at least across the United States after the first of the year, driven to a certain extent by a combination of cash flow needs and tax planning.
Values across Brazil are backing off as well, with new crop bean basis falling over 50 cents in some locations. The expectations of a record crop are allowing buyers across the country to feel confident they will have more than enough soybeans moving into the pipeline when the crop is harvested, prompting them to lower basis values paid. A weakening currency had initially pushed farmers to be a bit more aggressive with their selling at the start of the month, something that has since slowed as cash flow needs have been covered.
Chinese buyers see great crop prospects as a sign they will be able to buy bushels for less later as well, pushing them to move to the sidelines almost entirely. A more aggressive approach to purchasing early in the season has Chinese buyers with more new crop Brazilian beans on the books than seen a year ago as well, allowing them to feel more comfortable waiting to see if values cheapen further.
It is interesting to note though, the ideas we would see basis implode in the US at harvest this year never came to fruition, pinching some traders that had gotten too aggressive too early.
Corn basis is a bit more mixed globally, with the US still leading the way from an availability and cost standpoint. We have seen Brazil grow more competitive recently, working to push around two million metric tons into the global market through the end of February. This return to the world market will be interesting as it comes at a time when the world buyer has the bulk of their needs covered, at least for the short term, and is heading into holiday mode through year end.
What Does it Mean?
In my opinion, much of the physical short that was present in this market for the December/January timeframe should now be mostly covered at least for corn, with the major question becoming what February brings. From a farmer sentiment standpoint, it would not surprise me to see many of the growers who held too long last year, be aggressive sellers this year, working to exacerbate the short-term supply flush, and helping to pressure basis values further into the start of January.
From an overall standpoint, I fully expect values over the next few weeks to show signs of a more than adequately supplied pipeline, though we could see holes develop in the bean market without a futures rally. This push of farmer and commercial bushels into the market structure early into the New Year could also send false signals to the marketplace when it comes to overall supply availability.
In the end, cash is king, especially in grains, making what happens with basis and what it means for grain movement one of the biggest driving factors to watch when it comes to what happens next for futures.
