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21 Oct 2008 11:35 EST DJ FOCUS: Odd Autumn Basis Rally Bolsters US Cash Grain Market
By Gary Wulf
Of DOW JONES NEWSWIRES
CENTRAL CITY, Neb. (Dow Jones)--U.S. grain markets are currently in the midst of an all-out, contra-seasonal cash basis rally, which has added as much as 30 cents per bushel to farmgate prices paid for some commodities in just 2 1/2 weeks.
"Historically, this is the time of the year when basis is at its worst. This year however, we have seen basis improve, as grain movement has been much less than expected," said West Bend, Iowa commodity trade adviser Karl Setzer.
Experts are attributing the rally to a delayed harvest, a recent collapse in grain futures and bountiful storage space, all factors which have contributed to unusually slow farmer selling of new-crop grain this autumn.
Cash price indexes maintained by the Minneapolis Grain Exchange indicate that interior U.S. basis premiums have strengthened by an average of 7 cents for corn, 9 cents for hard red winter wheat, 21 cents for soybeans, 23 1/4 cents for soft red winter wheat and 30 cents for hard red spring wheat, since the first of the month.
"It is not unusual for soft wheat basis levels to firm during corn and bean harvest, as attention turns away from trading wheat and programs do not make room for shipping wheat," said Linn Group analyst Roy Huckabay.
Major exchange-monitored grain terminals reported a 13%-36% decline in daily average receipts of wheat last week.
Experts point out that it is especially odd to see strength develop in corn and soybean basis during autumn, as farmers begin to bring in their annual harvest. But this year's crop was planted late, is maturing behind schedule, and has been further delayed by rain, as well.
"This is shaping up to be one of the slowest corn harvests in recent memory," said Freese-Notis Weather. "Records would indicate that you would have to go back to 1996 to find the last time that less than 30% of the nation's corn crop had been cut by Oct. 19."
The USDA said Monday that U.S. farmers still had 33% of their soybeans and 71% of their corn crop left to pick, entering the week.
"The biggest concern with corn right now is that the crop is not drying down. Many reports coming in [indicate] that corn [moisture content] is getting to 20% and that is it," said Setzer. "We are now at a time to the year when additional dry-down in the field is hard to get."
Corn generally must carry no more than 15% moisture for placement into long-term storage.
Even farmers who have been fortunate enough to harvest their crops have generally been unwilling to relinquish title to them at current market prices - which are down 45-70% from record highs reached earlier in the year.
"The only grain that is flowing into the supply line at the present time, is what was forward-contracted," said Setzer. "Producers are putting as much grain as possible into storage in hopes of higher values later in the marketing year. This has caused basis to remain at tighter than usual harvest levels, especially in regions where buyers were counting on high new-crop grain flow."
Select Chicago Board of Trade-surveyed grain terminals across the Midwest received 5.65 million bushels of corn and soybeans last week, exactly half of the aggregate trade volume reported one year ago.
"For corn, the slow pace of harvest left some shippers scrambling to fill commitments, giving a boost to river and rail basis," said Bryce Knorr of Farm Futures. "While soybean harvest is further along, most farmers appear to be willing to lock up their crop rather than sell for depressed prices, especially those with revenue-based crop insurance, who appear assured of a nice check to cushion the blow of the big collapse in futures."
Shortages of grain bin-space - of a type which forced many farmers into making unwanted spot sales during recent harvest seasons - have also failed to materialize this autumn.
"So far there appears to be plenty of storage for the crop," added Knorr. "That's particularly true in parts of the eastern Corn Belt where yields are off. Farmers have built a lot of storage in recent years, and plan to put it to work this year."
Increasing foreign demand - which saw weekly export inspections jump nearly 5 million bushels - and a sharp decline in transportation costs have also combined to bolster domestic grain basis as of late.
"Basis levels [on the interior U.S. rivers system] were buoyed by falling barge rates over the past week," said Kevin McNew of Cash Grain Bids Inc. "[Barge freight] rates along the Illinois, Ohio and Lower Mississippi River were off 10 cents a bushel or more over the past week, helping push both corn and bean basis levels higher."
McNew, a basis specialist, warns that the rally in cash corn/soybean premiums may be short-lived though, once the Midwestern harvest finally accelerates.
"Basis levels should start to back off, especially as corn harvest picks up pace in traditional grain states," he said. "However, once we get past harvest, basis levels should start to improve. With falling fuel costs, grain transportation costs should follow suit and help lift interior basis levels in the coming months."
Basis is a key market differential that accounts for local supply/demand fundamentals, such as grain quality and production levels, the cost of transportation, the availability of storage, and the rate of consumption. Basis - plus or minus spot futures - yields the immediate or 'cash' price actually received by grain farmers at the time of sale.
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