Market Matters Blog

Basis: Game On

(DTN Chart)

In its weekly crop progress update released Monday afternoon, NASS pegged corn harvest at 75% and soybean harvest 87% completed. Both were at or slightly above five-year averages. In the grand scheme of things, one could say fall harvest will soon be wrapping up across the U.S. Midwest.

Then things should get interesting.

By almost all accounts, this year's corn and soybean harvests have been bin busters. As everyone knows, in its October Crop Production report USDA estimated corn production at a record 15.057 billion bushels and soybean production at 4.269 bb, also record large. The endless pictures of grain piles across the U.S. Midwest and Plains (both Southern and Northern) are testaments to the tight storage situation created by "the blessings of fruitful fields and healthful skies" (from Abraham Lincoln's Thanksgiving Proclamation). Another sign of the extraordinary supplies on hand during the rush of harvest has been the weakness of basis, particularly for soybeans.

I like to track national average basis each Friday evening, using the DTN National Index (national average cash price) minus the nearby or most active futures contract. This past Friday saw national average soybean basis rolled to the January, coming in at roughly 84 1/4 cents under. By comparison, the five-year average was near 51 1/2 cents under and the 10-year 60 cents under. The bottom line: A rally in futures plus continued selling of newly harvested bushels equals one of the weakest basis readings for any week over the last 10 years.

But all of that may be about to change. As October turns to November, farmer selling could start to slow. Futures spreads have already stabilized, with the January-to-March holding at just under seven cents. Looking at the market's forward curve, short-term carry is neutral while long-term carry is bullish. Yes, you read that right. The carry in the May-to-July spread covers only 28% of full commercial carry out that far.

How is this possible? Export business continues to run at a brisk pace. Monday's weekly export inspection figure (for the week ending Thursday, October 27) came in at a marketing year high of 105.4 million bushels. This followed the previous weeks' the previous week's "paltry" 100.7 mb. Furthermore, weekly export shipments (covering the same time period) are now expected to come in above the 100 mb as well when released Thursday morning. Marketing year shipments are already running ahead of pace, last calculated at 20% above the previous year as compared to USDA's October projection of 5% year-to-year increase.

As the five-year and 10-year seasonal indexes indicate, national average basis tends to strengthen for the balance of the marketing year. To see that this year, meaning to chew through all the supplies, means demand will have to remain strong. Short-term, basis at the Gulf has improved about seven cents over the last week, strength that will take time to ripple back up the river and across the Midwest. Whether or not it reaches the Plains is yet to be seen.

So what do we need to keep an eye on? First, basis. You should start to see small improvements over time. Also keep track of futures spreads, the room where merchandisers hide from illogical market moves made by noncommercial traders. Lastly, take note of weekly deliverable stocks numbers released each Tuesday, keeping track of how large or small supplies are getting at key export points.

Those still holding short-hedges, again focusing on the soybean market, could start to seem them appreciate if/when basis does start to improve. It's going to take time, and may not be as strong as seasonal indexes would imply, but the next couple of weeks should start to get interesting.

Or as one trader put it, "Game on."

To track my thoughts on the markets throughout the day, follow me on Twitter:www.twitter.com\Darin Newsom

(CZ/)

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