Any day, farmers and others can get grain price quotes from the CME Group, also known as the Chicago Board of Trade (CBOT), in “real time” on their computer or I-phone. . Almost as quickly, they can obtain current and future market prices for corn and soybeans from local grain elevators, ethanol plants, and processing plants. The difference between the local grain price and the CBOT price is called the “base”. Understanding how the base works and the seasonal patterns associated with the base can be an important factor in making corn and soybean marketing decisions.
Specifically, the “basis” is the difference between the local grain price on a specific date and the CBOT price for the corresponding futures contract month. Local crop prices for corn and soybeans would generally match the December CBOT corn futures price and the November CBOT soybean futures price. By comparison, storing corn or soybeans after harvest and selling the grain via a futures contract in June or early July the following summer would have the base level corresponding to corn or soybean futures July CBOT.
A “narrow” or “tighter” basis means that the local price of corn or soybeans is approaching or exceeding the corresponding CBOT price, while a “wide” or “wider” basis reflects local grain prices that have a larger margin below CBOT prices. For many years until recently, farmers in the Upper Midwest faced “negative” basis levels, meaning local corn and soybean prices are below corresponding CBOT prices. Areas near Mississippi River ports or in the southern United States more generally have “positive” base levels, where local grain prices are above CBOT prices. However, several regions in the Upper Midwest have had “positive” baseline levels for corn and soybeans at times in 2021 and 2022.
While the definition of “base” may seem simple enough, the dynamics of understanding base can be quite complex. The basis is variable by location and may vary throughout the year, or be suddenly adjusted due to changing dynamics in grain market fundamentals. Here are the main factors that affect the base and can lead to changes in the base levels:
- Geographic variations: The base of corn and soybeans can vary widely from place to place, largely depending on the amount of local grain production to be used as livestock feed or for use in processing and production of ethanol. As a result, base levels tend to be wider in western Minnesota and Dakota than in southern Minnesota, which has heavy livestock production, as well as several ethanol and soybean processing plants. .
- Transport costs: This is the cost of shipping grain from the local point of sale to the point of final destination, whether it is used in the United States or transported to ports to be shipped for export to other countries. For example, areas that use a large percentage of the corn and soybean production in the region have less grain to transport to ports or to other parts of the United States will generally have a tighter baseline. Also, being closer to the Mississippi River, a major port, or a major rail line tends to lower transportation costs and result in tighter baselines, but not in all cases.
- Supply and demand: Aggregate U.S. grain supply, based on a given year’s crop production and previous year’s grain carryover levels, as well as grain use for livestock feed, processing, ethanol production and exports, may result in year-to-year variations in baseline levels. For example, corn and soybean base levels in 2021 and 2022 in many regions have been tighter than normal due to strong export demand to China and increased domestic demand for livestock feed and processing. Low crop yields in a local area can also affect the base in a given year. Local areas that had below average corn yields in 2021 or 2022 had a “positive base” at times for corn and soybeans, due to strong local demand for corn for animal feed and ethanol production, as well as demand in soybean processing plants.
- Storage and interest charges: In a normal year, CBOT corn and soybean futures and spot prices tend to be lowest at harvest time and then rise the following summer. As the weather gets closer to the actual grain delivery date, depending on demand, local grain prices may be higher than CBOT prices, resulting in tighter base levels. The baseline situation in the Upper Midwest in 2021 and 2022 has been different from normal due to a combination of lower-than-expected crop yields, as well as strong demand for corn and soybeans. The rapid increase in interest rates over the past few months has led to a much higher cost of storing grain until next summer, encouraging farmers to sell grain over the next few months in order to profit tighter current base levels.
There is currently a wide range of baseline levels of corn at harvest time in the Midwest, depending on 2022 corn yields and corn utilization demand. For example, in parts of Nebraska and Kansas that were hit by drought in 2022, the base level for corn in early November is +$0.50 to +$1.50 above the price at CBOT December corn term nearby, which is very different from normal. By comparison, corn base levels in the southern Illinois regions are ($0.50) to ($1.00) per bushel below the December CBOT price, which is a much lower base level. wider than normal, resulting from reduced barge traffic on the lower Mississippi due to low water levels. The national average base level for corn on Nov. 3 was +$0.05 a bushel above the December CBOT futures price.
The base level for corn on Nov. 3 in southern Minnesota ranged from approximately ($0.25) a bushel below the December CBOT futures price to +$0.15 above the CBOT price. Basis levels for soybeans in southern Minnesota on Nov. 3 generally ranged from ($0.15) below to +$0.05 above the January CBOT futures price, with some soybean processors possibly reach +$0.40 above the futures price. In the six years (2015-2020) leading into 2021, corn base levels in early November in southern Minnesota generally averaged ($0.35) to ($0.45) per bushel below futures price close to CBOT and soybean basis levels were ($0.08). 0.40) to ($0.90) per bushel below futures prices.
Currently, many farmers are quite “optimistic” about grain market prices in 2023, meaning they believe there is a good chance that corn and soybean prices will rise in the coming months. Current baseline levels for both crops in many regions are encouraging producers to sell their grain over the next few months, rather than waiting until next summer to market the grain. Corn futures and spot prices are currently expected to remain fairly flat through July 2023, meaning there is very little difference in the baseline levels expected by next summer. At southern Minnesota soybean processing plants, the basis for soybeans was +$0.40 a bushel on Nov. 3 from minus ($0.15) a bushel in July 2023, so even if the futures price the CBOT for July is $0.16 a bushel higher than the January price, the spot supply for soybeans in July is ($0.39) a bushel lower than the current spot supply.
There are several grain marketing tools that farmers can use in addition to cash sales, including a variety of hedging, options and basis contracts. . For example, an “arrival hedge” contract locks in a CBOT futures price, but the basis is not finalized until the futures contract is cleared and the grain is sold. In comparison, a basis contract locks in the basis but keeps the final price open based on changes in the corresponding CBOT futures price and the actual spot price at the time of delivery. Depending on an individual’s willingness to assume some market risk, they could also sell the grain for cash to take advantage of current base levels and take a CBOT option or futures price position to hold upside potential in the corn and soybean markets.
Most grain marketing strategies, including priceless grain storage in an on-farm bin, involve some level of price and/or basis risk. Understanding the dynamics of the corn and soybean market price base is a key element in analyzing the different types of grain marketing contracts that are available to farmers. Iowa State University has good information based on understanding and various grain marketing strategies. This information is available on the “Ag Decision Maker” website at: https://www.extension.iastate.edu/agdm/.
For more information, contact Kent Thiesse, Farm Management Analyst and Senior Vice President, MinnStar Bank, Lake Crystal, Minnesota at 507-381-7960 or kent.thiesse@minnstarbank.com.
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