Corn+Soybean Digest

Understanding Basis Enhances Your Income

Making money by raising soybeans this year took a lot of good planning and an understanding of when to hedge and when to convert your soybeans into cash. The key to making the right decision is to study and be aware of your cash basis. Basis is the difference between the nearby futures market and your local cash bid.

In mid-September 2000, the grain trade was building in a huge corn and soybean crop with the thought that a lot of farmers would be forced to sell right at harvest. I read daily forecasts of how many millions of bushels of corn and soybeans would be piled on the ground as storage ran out in the Upper Midwest.

These forecasts were wrong, and the traders who bet on forced farmer selling on a wide basis are out looking for new jobs.

Five factors combined to improve cash basis bids from some of the worst ever to the best ever in just six weeksp:

1) This year, the size of the big crop was reduced as farmers got into combines and started harvest. The smaller, very dry crop found its way into on-farm storage, even if it was old bins or silos.

2) As farmers looked at the cash price versus bids out into March through July of next year, many producers took the LDP and hedged the crop for later delivery. By understanding merchandising, they captured the carry, not the local elevator.

3) Barge tariff rates fell during the glut of harvest, as the supply of barges was much larger than the actual demand. Barge freight rates are quoted as a percentage of tariff. In mid-September, barges were trading at 310% of tariff. By the end of October, the rate had dropped to just 160% of tariff. Freight rates, like the futures market, are difficult to forecast. But when the river closes, the upper Mississippi River basis bids always decline.

4) Strong export demand had exporters bidding aggressively to buy cash soybeans. Several farmers with over 20,000 bushels of soybeans to sell were getting multiple bids each day. You can not ship paper. The grain buyers needed cash soybeans and cash corn to get the barges loaded. At one point, over 400 empty barges were waiting to be filled on the river.

5) Good crush rates had processors competing with exporters for limited soybean supplies. Crush margins improved to over 70/bu by early November, the best crush rate since 1997. With those kinds of margins, look for processors to stay aggressive until South American meal and oil become available in the global market.

What to do: Farmers, like grain elevators, should prepare daily merchandising worksheets that show what their cash bids are, what the current basis is, and what the differed bids and basis levels are trading at.

This course of action will help you make the right merchandising decisions and play an important part in running a profitable farm business.

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