Kub's Den

Color Coding the Pain

Elaine Kub
By  Elaine Kub , Contributing Analyst
DTN graphic by Kathryn Myers and Elaine Kub.

It's nearly impossible to compare grain basis bids over time, because all the factors that go into a basis bid -- local supply and demand, trucking costs, other freight and handling costs, competition among nearby processing plants, etc. -- are dynamically changing from one day to the next, to say nothing of a market's changes from one year to the next. Nevertheless, traders and analysts who watch basis patterns have a sense for what is "normal" at any given time of year, and the soybean basis bids from the early part of the 2018 harvest are not normal.

Basis is the difference between a benchmark futures price for a commodity and the price of that physical commodity at a particular location at a particular time. So if the November soybean futures contract closed Friday at $8.47 per bushel, and the local cash bid for physical soybeans in Grundy Center, Iowa, for instance, was $7.46 per bushel, then we would know the basis bid at Grundy Center on Friday was $1.01 under the futures price. Turns out that's pretty close to the nationwide average, although admittedly it gets a bit squirmy to talk about "averaging" basis bids when basis bids are, by definition, location-specific numbers. All the 2,822 posted U.S. soybean basis bids collected by DTN last Friday afternoon, when averaged together, came to $1.03 under the November futures contract. The bids ranged from $2.05 under futures in central North Dakota to $0.05 under futures in Baton Rouge, Louisiana, but they were universally weaker than the soybean bids this time last year, or during any year in recent memory.

There is still no bid for soybeans to arrive at Pacific Northwest (PNW) export shipping terminals, and therefore, the elevators that would typically be collecting newly harvested soybeans in September and loading them into rail cars to be shipped westward across the ocean are instead just stuck storing those beans. Indefinitely. Soybean business isn't so hot at the Gulf of Mexico, either, while the United States' former number one buyer of soybeans, China, continues to impose a 25% tariff on U.S. soybeans, and avoids this market as much as possible. So weakness has infected the entire soybean supply chain, even at the doors of domestic soybean processors who are happy to crush the abundant soybeans being offered to them, but who don't need to bid aggressively when there is so little outside competition. One Midwestern soybean crusher who was bidding $0.70 under futures on Friday, Sept. 22, 2017, was bidding $1.00 under futures on Friday, Sept. 21, 2018.

Last year isn't even the best comparison to benchmark "normal." There was a large crop and some hiccups in barge freight late last September, and soybean basis was unusually weak in 2017, too -- nationwide average soybean basis was 73 cents under the November futures contract. Looking over the past 18 years, we would more reasonably expect to see nationwide average soybean basis during the third week of September hover somewhere around 54 cents under the November futures contract. (-56X in 2016, -54X in 2015, -51X in 2014, etc.) The year 2007 was notable -- nationwide average soybean basis was -$1.01 under futures in late September, but now 2018 has surpassed even that historic performance.

As flat prices, today's soybean bids are even more discouraging. Friday's local posted soybean prices ranged anywhere from $6.47 to $8.42 per bushel. The nationwide average (the DTN National Soybean Index) was $7.44 per bushel, or $1.56 cheaper than the $9.00 average cash bid on Sept. 22, 2017. Futures prices, of course, are $1.37 per bushel cheaper now than they were last year at this time, so that accounts for a portion of the difference, but at any given local elevator, we could say somewhere from 12% to 38% of the flat price difference from last year to this year has been due to basis weakness instead of the lower futures benchmark itself.

To emphasize again that this isn't just a problem for North Dakota and the other PNW feeder states, consider that average basis levels in Illinois are 38 cents weaker now than they were last year at this time. In Wisconsin, they're 40 cents weaker. In Tennessee, they're 44 cents weaker. Below, you can find a table of selected states' average soybean basis bids at this time last year, compared to the current statewide average posted soybean basis bid.

There will be days when the soybean futures market will pop, based on rumors or outside markets, or eventually, someday: an actual, realistic outlook for improved soybean export prospects. But until the physical trade scenario changes (and even then, it will take a long time to rearrange shuttle trains and address other transportation challenges outside of the typical soybean-shipping season), this ugly basis scenario is likely to persist.

State by State Average Soybean Basis Bids

September 22, 2017 and September 21, 2018

Alabama 17: +$0.25 18: -$0.15 (difference -$0.40)

Arkansas 17: -$0.17 18: -$0.62 (difference -$0.45)

Iowa 17: -$0.75 18: -$0.97 (difference -$0.23)

Illinois 17: -$0.42 18: -$0.80 (difference -$0.38)

Indiana 17: -$0.39 18: -$0.70 (difference -$0.31)

Kansas 17: -$1.00 18: -$1.21 (difference -$0.21)

Kentucky 17: -$0.31 18: -$0.80 (difference -$0.48)

Louisiana 17: -$0.04 18: -$0.28 (difference -$0.25)

Michigan 17: -$0.74 18: -$0.85 (difference -$0.11)

Minnesota 17: -$0.86 18: -$1.19 (difference -$0.34)

Missouri 17: -$0.58 18: -$0.77 (difference -$0.19)

N. Dakota 17: -$1.07 18: -$1.71 (difference -$0.64)

Nebraska 17: -$0.95 18: -$1.30 (difference -$0.36)

Ohio 17: -$0.46 18: -$0.70 (difference -$0.24)

Oklahoma 17: -$0.90 18: -$1.11 (difference -$0.21)

S. Dakota 17: -$1.03 18: -$1.34 (difference -$0.31)

Tennessee 17: -$0.20 18: -$0.63 (difference -$0.44)

Wisconsin 17: -$0.73 18: -$1.13 (difference -$0.40)

Source data: DTN/The Progressive Farmer

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub

(BAS/SK)

Elaine Kub