Grain Market Outlook

Grain Futures Carrying Charges & Kansas Cash Basis Trends

May 8, 2012

Other Reports:
1. Soybean Outlook and Market Impacts from the May WASDE Report (May 16)
2. Corn and Grain Sorghum Market Impacts from the May WASDE Report (May 11)
3. March 31st Grain Stocks Report Summary (April 4)
4. Prospective Planting Report Summary (April 2)
5. Wheat Market Impacts (March 16)
 

Summary: Grain Futures Carrying Charges & Kansas Cash Basis Trends

Futures contract spreads and cash basis levels this spring have indicated that very tight supplies exist for U.S. corn and soybeans, and that substantial wheat feeding is likely to occur in order to make up for extremely tight feedgrain supplies in the summer months.  Grain futures and cash basis market signals appear to support the idea of “tight old crop-followed by more abundant new crop supplies” as an accurate representation of market trends for 2012.

In the coming months important questions will be answered regarding the tightness of old crop U.S. corn and soybean stocks prior to 2012 new crop fall harvest, and the degree to which what are anticipated to substantial U.S. wheat supplies this year will be needed to “make up” for tight current feedgrain market supplies.  This article examines current corn, soybean and wheat futures spreads and associated Kansas cash basis levels, and what signals these market indicators appear to be giving in terms of grain price trends and directions in the coming months.

Corn and Grain Sorghum Futures & Basis

Corn Futures: Carrying charges in CBOT corn futures have become inverted this spring (Figure 1).  On Friday, May 4^rd the May CBOT corn futures contract (which is now in its contract delivery period) closed at $6.62 per bushel, with the July contract closing at $6.20, fully $0.42 per bushels lower.  July corn futures also closed $0.85 above September corn ($5.35), and $0.96 above December 2012 corn ($5.24).  This indicates that the corn marketing is anticipating a marked drop in corn futures once early harvest supplies become available from the southern U.S. in late summer-early fall, and that corn futures prices will drop even further once the bulk of the U.S. harvest begins in earnest farther north in the U.S. Corn Belt. 

Corn & Grain Sorghum Basis: Corn basis bids at the feedgrain demand center of Garden City, Kansas (i.e., a central location for cattle feeding and ethanol production) have been historically narrow or “strong” thus far in 2012, ranging from $0.05 to $0.20 above the March, May, and Now July CBOT corn futures contracts to date this year (Figure 1).  These basis levels in late April-early May, 2012 are $0.20-$0.85 /bu. stronger (i.e., higher relative to historic basis levels) than at any time during the 2008-2011 period.  Figure 1A shows grain sorghum basis bids in Garden City as well, showing a similar pattern to corn basis in Figure 1 except for a brief “spike” higher in early February 2012, but with basis levels being approximately $0.50 per bushel wider (i.e., at $0.30-$0.35 per bushel under futures for grain sorghum as opposed to $0.20 over for corn).

Figure 1. Carrying Charges for CBOT Corn & Corn Basis Bids in Garden City, Kansas

Figure 1A. Grain Sorghum Basis Bids in Garden City, Kansas

Soybean Futures & Basis

Soybean Futures: Although carrying charges in upfront CBOT soybean futures contracts have become inverted for short periods of time this spring, they presently reflect weak, small carrying charges with limited if any incentive to store soybeans as opposed to selling them.  On Friday, May 4^rd the May CBOT soybean futures contract (which is also now in its contract delivery period) closed at $14.75 per bushel, with the July contract closing at $14.78, only $0.03 per bushel higher (Figure 2).  July soybean futures closed $0.20 higher than August soybeans ($14.58), $0.81 higher than September 2012 ($13.97), and $1.11 higher than November 2012 soybean futures ($13.67) – indicating that the grain market is also anticipating a marked decline in soybean prices once the U.S. soybean harvest begins in earnest, typically in late September-October.

Soybean Basis: From January through late February 2012, soybean basis bids at Wichita, Kansas were narrower or “stronger” than at any time during the 2008-2011 period, but have since “weakened” on a relative basis (Figure 2). As of early May, Wichita-area soybean basis bids were near $0.50-$0.55 under futures, within the range of the Wichita-area soybean basis levels during the 2008-2011 time period.

Figure 2. Carrying Charges for CBOT Soybean & Soybean Basis Bids in Wichita, Kansas

Wheat Futures & Basis

KCBT Wheat Futures: Carrying charges in upfront KCBT wheat futures contracts have been “strong” throughout most of the winter and early spring, reflecting nearly full commercial carrying charges and signaling holders of wheat inventories to continue to store rather than sell their wheat inventories.  On Friday, May 4^rd the May KCBT wheat futures contract (which as for corn and soybean futures is also now in its contract delivery period) closed at $6.14 per bushel, with the July contract closing at $6.27, representing a spread of $0.13 per bushel between the contracts and an average of nearly $0.06 ˝ per bushel per month – which is approximately equal to full commercial carrying charges (Figure 3). 

July wheat futures closed about $0.16 under September wheat ($6.43), which represents a carrying charge of just under $0.08 /bu/month, or nearly 120% of monthly full commercial carry.  Similarly, December 2012 KCBT wheat closed at $6.65, representing a carrying charge of about $0.074 per month, or about 112% of full commercial carry.  The carrying charge from Dec 2012 to March 2012 wheat of $0.056 /bu/mo equals 84% of full commercial carry.   These large carrying charges represent in KCBT wheat futures indicate that the market is preparing to store hard red winter wheat that is to be harvested in the summer of 2012 through the fall and winter months of late 2012 into early 2013.

This structure of futures market contract prices also reflects the differing seasonal storage cost structure on delivered wheat now in place for KCBT wheat futures contracts.  After contract specification changes instituted in 2010, differential seasonal storage rates for delivered wheat on the KCBT wheat futures is $0.09/bu/mo for the July-November period, and $0.06 /bu/mo for December-June. 

Figure 3. Carrying Charges for KCBT Wheat & Wheat Basis Bids in Hutchinson, Kansas

Kansas Wheat Basis: From January through late April 2012, wheat basis bids at Hutchinson, Kansas were narrower or “stronger” than at any time during the 2008-2011 time period.  Generally, these tight wheat basis levels were taken to be market indicators of tight wheat supplies in drought ravaged areas of Kansas on the one hand and the “pull” of wheat into feeding and even bioenergy usage as a substitute for tight feedgrains on the other.

However, since mid-April wheat basis levels in many locations have begun to “weaken” relative to earlier in the year (Figure 3). By early May, Hutchinson-area wheat basis bids were near $0.20 under futures, similar to basis levels at this time of year during the 2008-2009 time period. It is likely that this decline in basis bids reflects the market’s anticipation of a larger 2012 Kansas wheat crop and the anticipated need by Kansas farmers for substantial commercial grain elevator storage to hold the crop until it can be moved into commercial usage channels later in the 2012-13 marketing year.  When grain elevators do not have to bid aggressively for limited supplies of wheat from farmers to either fill their storage facilities or move it via rail or other means to end users, then their basis bids will typically weaken.