November 1, 1999
CORN AND SOYBEAN BASIS OPPORTUNITIES
Corn and soybean basis and basis
patterns have been somewhat unique this year. Patterns in central
Illinois are used to illustrate some pricing opportunities that
are currently available.
The spot corn basis in central Illinois
was unusually weak through the harvest period this year, averaging
about -$.34 (relative to December futures) in the month of September
and -$.32 in the first week of October. The basis was about equal
to that of last year, but much weaker than the average of -$.16
in 1997 and -$.07 in 1996. The weak harvest basis, and relatively
large spread in the futures market, the past two years has favored
storing the crop and forward pricing for later delivery. Forward
pricing with futures contracts or hedged-to-arrive contracts were
favored over standard forward cash contracts because the contract
prices often reflected a weak basis as well.
For soybeans, the average basis
in central Illinois in September was about -$.30 (relative to
November futures). That weakened to about -$.34 in the first week
of October. Basis during that same six week period averaged -$.26
last year, -$.12 in 1997, and -$.17 in 1996. The spread in the
soybean futures market was much smaller this year than during
harvest last year. The November 1999 - March 2000 spread averaged
about $.17 and the November 1999-July 2000 spread averaged about
$.25. Last year those spreads averaged about $.21 and $.40, respectively.
The smaller spread this year made the strategy of storing and
forward pricing less attractive than last year.
By the end of October, the corn
basis in central Illinois had strengthened to an average of -$.225.
Further strengthening is expected as harvest is complete and farmer
sales for immediate delivery are very light. Basis will likely
strengthen, assuming futures prices remain in a narrow range,
to attract additional sales. Last year, the basis moved to about
-$.06 during the last half of November, about the same level as
in the two previous years. Such an improvement this year would
provide an opportunity to price any corn for which the loan deficiency
payment (LDP) is established or which is under loan with a fixed
repayment rate for 60 days. Hopefully, basis strengthening will
not be offset by lower futures prices. That is a possibility,
however, if the November crop estimate is larger than expected.
Producers may want to consider selling futures or using an hedged-to-arrive
contract to capture any basis strengthening by year end without
risking lower futures prices. Forward contracts will generally
not allow that since forward bids currently reflect a very weak
basis. On October 29, bids in central Illinois for January delivery
reflected an average basis of -$.225 (relative to March 2000 futures).
That compares to the actual basis in January of about -$.10 in
1999, -$.12 in 1998, and about -$.07 in 1997.
On October 29, the average spot
soybean basis remained very weak, at -$.27. That is about $.03
weaker than last year, but $.17 weaker than in 1997 and $.19 weaker
than in 1996. Basis relative to March 2000 futures (on October
29) averaged -$.47, similar to the level of the basis on the same
date last year. By January last year, the basis had strengthened
to an average of -$.12, compared to -$.06 in 1998, and -$.08 in
1997. The bids for January 2000 delivery in central Illinois currently
reflect an average basis of only about -$.29. As with corn, there
is an expectation that the soybean basis will continue to strengthen.
Basis strengthening, if it occurs, could add $.15 to $.20 to the
price of soybeans for which the LDP is taken or for soybeans entered
into the loan under the new provision that locks in the repayment
rate for 60 days. The risk of lower futures prices over the next
60 days can be eliminated by selling futures or entering into
a hedged-to-arrive contract.
While hedging of stored corn and
soybeans for a relatively short period of time has the potential
to earn an attractive basis gain, it eliminates the opportunity
to benefit from higher futures prices over the next two or three
months. An alternative might be to hedge with the purchase of
put options. The premium for at the money ($2.10) March 2000 corn
put options is $.09 per bushel. The premium for $5.00 March 2000
soybean put options is about $.29. Since $5.00 put options are
about $.09 in-the-money, the effective premium is $.20 per bushel.
For corn, the expected basis gain will more than pay for the put
options. For soybeans, the premium is a little larger than the
expected basis gain.
Issued by Darrel
University of Illinois