Market Matters Blog

The Rapid Demise of the Corn Basis

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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The national average corn basis peaked during the first week of March. Since then, the basis has been on a downward slide as ethanol plants weakened or pulled basis bids. (DTN chart by Mary Kennedy)

The national average corn basis started the new-crop year 23 cents stronger than the five-year average basis. As of the first week of March, the national average basis was at -12K, peaking at 20 cents stronger than the five-year average. For the fourth week of March, the national average basis was at -26K, 14 cents weaker than the start of the month. As you can see on the chart accompanying this column, the corn basis has been riding high above the five-year strongest basis. Until now.

That all changed when the coronavirus pandemic began to pull gasoline prices below $1 per gallon and, in turn, pulled ethanol prices lower as well. The cheaper price of gas, now at a steep discount to ethanol (41.2 cents), has deeply stressed plant margins, causing many ethanol plants to slow production or go offline for now. In turn, plants either pulled corn bids or posted sharply weaker bids in the past few weeks.

Why does that matter? Nearly 40% of U.S. corn is used for ethanol production. That strong demand for ethanol production has resulted in higher corn prices over the years and has provided incentives for farmers to increase corn acreage, according to the USDA ERS Feb. 26, 2020, report "Feedgrains Sector at a Glance."

Here is a link to the report with more info on U.S. corn usage: https://www.ers.usda.gov/….

A farmer on social media sent me a note reporting that basis in his area in eastern Wisconsin weakened 30 cents to 40 cents at the local ethanol plant the past three weeks, with elevators in that area who ship there also weakening basis levels. Another farmer posted a note saying ethanol plants were "slashing" basis, an obvious sight we have all witnessed and more so in the last seven days.

Tim Luken, manager of Oahe Grain Corporation in Onida, South Dakota, told me, "Like everywhere else, ethanol plant corn basis levels collapsed even here in central South Dakota from -20 cents in January and now at -70 cents for March and April. I did hear ethanol plants are running at 50% to 60% capacity."

Luken noted that current bids are now for export corn. "But, our problem is that we have light test weight. There is a large amount of wet corn in the bins around here. When we do dry higher-moisture and light-test-weight corn, our broken corn and foreign material really increases, adding to our quality issues. That is just another issue many elevators have to deal with, along with producers in our area. I just hope producers are watching their bins and taking precautions while unloading."

It's no secret that the current export market for corn has been below average compared to last year. The March 26 weekly export sales and shipments were a nice surprise for corn. USDA reported that, for the week ended March 19, there was an increase of 71.4 million bushels (mb) (1,814,300 metric tons) of corn export sales for 2019-20 and an increase of 3.3 mb (82,900 mt) for 2020-21. While the year-to-date total improved a little with last week's report, corn commitments remain down 28% for this crop year versus last year at the same time.

I contacted Angie Setzer, vice president of grain at Citizens LLC in Charlotte, Michigan, and I asked her what effect the slowdown in ethanol plants is having on basis in her area.

"We've seen values drop as much as 75 cents at one location, with a 40-cent drop being more in line, I would say, with average loss," said Setzer.

I asked her if her elevator was still open for limited business given the cheaper basis and possible lack of available ethanol plant business.

"We're open for business, but our facility is not necessarily one that takes in a lot of grain outside of harvest," said Setzer. "Obviously, the rail market still has potential to heat up as we move forward, but at this time, it appears the feed market is really the only game in town."

She told me that new-crop basis was much wider than old-crop values being paid before the drop, so she hasn't seen a drop there at this point in time.

"Without a major change in ethanol outlook or rail values, a drop could definitely be in the cards," added Setzer.

"There are a lot of bushels in the bin on the countryside still. Many have been doing something at the very least; while others that were caught somewhat flatfooted have said they are willing to wait until summer to see if things change. I have had a few farmers looking at different additions to their rotations at the expense of corn acres. Some are looking to non-GMO soybeans because of the premiums offered by elevators in the state. Others are looking to crops they may not have thought about in a while. One customer mentioned he might be looking to grow dry beans this year, which is something I haven't seen around here in several years," concluded Setzer.

Until ethanol plants can run at full production, the corn basis will struggle. The next question is whether that will have an impact on corn acres this spring. I did a quick survey on Twitter of the many farmers I follow throughout the country. Here are the final results of that poll with 218 responses:

Question: Hey #AgTwitter, given the weakness in cash corn/basis will you change your 2020 corn planting intentions?

A: Yes, planting less acres. (36.7%)

B: Not changing intentions. (63.3%)

Depending on what the next month brings for the value of cash corn, some farmers may rethink corn planting intentions in the Midwest.

Here are links to related corn market stories published by DTN:

"The Argument Tilts Back to Soybeans" by DTN Lead Analyst Todd Hultman: https://www.dtnpf.com/….

"Corn Gets Crushed by Plunging Crude Oil, Ethanol, Gasoline" by DTN Senior Analyst Dana Mantini: https://www.dtnpf.com/….

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow her on Twitter @MaryCKenn

(BE/BAS/AG)

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