Basis levels at harvest have held up fairly well this season thanks to strong demand and a declining carryout projection. What is usually a 10- to 20-cent dip in basis in the fall has been mostly muted, with only some weakness noted around river terminals that have faced escalating barge freight. Looking ahead to January delivery, how will basis levels likely fare?
To answer that question, we utilized 15 years of January contract basis from FBN’s Profit Center. A model of basis was derived from this data using stocks, production and futures spreads. Based on where these levels are today, we then predicted the likely basis for January delivery, and those forecasts are illustrated with the dotted green lines in the charts.
For corn, most states are trading above average on January delivery basis for this time of year. But, Indiana and Ohio are trading closer to their long-run means. Both states have had solid crop prospects, which is likely keeping basis levels in check. But, a key driver for strength going forward is the limited carry on board prices. With the December/March spread going from +8 at the start of the month to +2 today, this implies basis markets will have to do the work to encourage farmer deliveries into January and beyond, which should start to push basis levels higher for deferred delivery. In nearly all states examined, FBN’s basis forecast is higher than the market's current bids for January delivery.
For soybeans, a similar storyline appears. A lower carryout and spreads that do little to encourage storage suggest more upside on basis. But here, the effects are not as pronounced on corn. The gains are likely to be best in the eastern Corn Belt where the dual threat of soy processing capacity and export markets can keep a strong backdrop for pipeline supplies.
Locking in forward basis for January is generally not a good long-run strategy. Usually, spot basis levels in January are better priced than basis levels on a contract for January delivery. For corn, there appears to be decent upside potential this year to hold off on locking in, but beans are a bit less clear depending on the geography. Unforeseen events such as Chinese demand after January and drought problems in South America could change this paradigm.
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