Kub's Den

Corn Basis: Market Rich With Arbitrage Opportunities

Elaine Kub
By  Elaine Kub , Contributing Analyst
Corn basis bids collected daily by DTN illustrate the hot spots of short supply in the Eastern Corn Belt in mid-December 2019. (DTN graphic)

Countryside corn basis is pretty strong everywhere this December -- as a U.S. nationwide average, corn basis bids are about 15 cents stronger than they were at this time last year. However, there are some hot spots and some cool spots, which suggest the physical grain may have to move in unusual traffic patterns through the upcoming year.

First, the hot spots: Most Midwestern corn processors are currently posting bids either a couple cents over or a couple cents under the nearby (March, or "H") futures contract. When a grain buyer posts a basis bid of -2H, for instance, and the March futures contract is trading at $3.88, then the subsequent cash price at that grain buyer's location comes out to be $3.86 per bushel. But once we look further east and hit Ohio, there are multiple corn buyers -- ethanol plants, co-ops, livestock feeders, you name it -- that are posting bids at +40H, equivalent to a local cash price of $4.28 at the start of this week.

In the middle of the Corn Belt, there's robust competition from local processing versus local livestock feeding versus the barge market to take the corn to export terminals. That's one of the reasons why the Eastern Corn Belt typically has stronger basis bids than the Western Corn Belt, but they're usually not this much richer. The price difference, or the "spread," between western corn and eastern corn isn't usually this wide.

To take a specific example, let's compare corn bids in eastern North Dakota to the ones in western Ohio. There is a dollar of difference between the -60H spot bids in the Fargo region and the +40H spot bids in the Dayton region. Such a large west-to-east spread happens sometimes, usually around harvest time when the far west corn bids are especially depressed. The dollar-plus spread doesn't usually persist for five months at a time, as this one has, because this time it isn't a function of excessive harvest supplies or freight issues; instead, it's clearly a manifestation of short supply in the Eastern Corn Belt. Ohio corn basis has been hot all summer while the grain buyers have responded to a lack of planted acreage with noticeably keen prices.

Meanwhile, there are 940 physical miles between the two locations. Let's say a trucker could fit 1,000 bushels of low test weight North Dakota corn into a trailer and haul it for $0.94 per bushel all the way to the corn shortage region in Ohio -- there would theoretically be a little profit in that.

Grain will go where it's most wanted, where buyers will pay the most for it. The problem is, there aren't customary freight routes to get corn moving from west to east. Corn traditionally moves southward down the Mississippi River (away from the Corn Belt), or southward by rail to livestock feeders (away from the Corn Belt) or westward by rail (away from the Corn Belt), but almost never eastward (deeper into the Corn Belt). The North Dakota-to-Ohio truck trip would look highly unlikely for a lot of reasons, most of all the lack of established backhaul opportunities across that distance. This isn't a traditional movement and inventing the program to make it work wouldn't be easy.

Therefore, the transportation solutions required to satisfy the hottest regions of corn demand will have to be creative. For instance, there are traditional rail routes to take wheat from eastern North Dakota to Duluth, and perhaps traders could get corn shuttles on that path and then send the corn over the Great Lakes to Toledo.

The biggest reason why any of this might be looking attractive to cross country grain traders right now isn't necessarily the basis spread itself; that dollar of difference between Fargo and Dayton may not be a big enough prize. Instead, it's the discounts, and mix and blend opportunities that will really get western corn moving in strange directions during the coming months. And what opportunities there are! Say there's a $0.25 per bushel discount for No. 3 corn (with at least 52 pound test weight) compared to No. 2 corn (with at least 54 pound test weight). That discount is a moving, negotiable target and it's hard to say how it might trade on any given day. Wherever it might be, it's an opportunity for the grain buyers in shortage regions, eager for supply, to buy in discounted corn and either mix and blend it into non-discounted No. 2 corn, or simply feed it, or process it according to the Total Digestible Nutrients that are still present in the grain.

It's not the mission of this column to identify arbitrage opportunities for cross-country traders. I'm 100% certain that those who make such trades happen are either already doing so or putting plans in place to do so over the coming months. These are merely some examples of the kinds of opportunities they'll be seeking and they won't necessarily require any 900-mile truck journeys. Note that there are other current hot spots of strong demand reflected by strong basis -- the livestock feeders in northwest Iowa are bidding +5H already, the dairies in Wisconsin are also seeing "over" basis, and there's a grain buyer in Michigan posting a +45H bid.

This basis picture is a reflection of supply-and-demand reality even when the futures market may seem inefficient. Markets respond to reality, ultimately. It may take time for the routes to be developed (or to open up, in the case of water-based transportation), but the grain will move. There are implications for farm-based marketers: namely, that the eventual movement of the corn will be an equalizing force on the nationwide basis picture, releasing pressure from the hot spots and adding support to the weaker values. Therefore, grain owners in the regions with screaming hot basis might consider locking in those opportunities now before the "foreign" grain has a chance to arrive and change the supply scenario. Grain owners elsewhere might feel confident -- to the extent that they're able to keep control of their grain on-farm and that less draconian discount schedules might be found in the future once homes are found for the grain. And even for perfect, dry, 56-pound corn, strong basis opportunities are likely to persist.

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

(BE/CZ)

Elaine Kub