By Kevin McNew and J.C. Hoyt
In the futures markets, corn prices have gone from $3 to $7.50 a bushel in the last year, while soybean prices Kevin McNew, Cash Grain Bids, Inc., predicts more basis pressure this harvest season. rose from $8 to $16 over the same
Hi h bgh-risk investments yield igher returns, right? It’s a asic premise of investing, but there’s an important caveat. As an investor, you may face a large loss before you ever reach a point of higher returns.
You don’t have to be a financial guru to recognize that grain prices have turned into high-risk markets.
Photographs: Doug Hetherington, Mike McGinnis
12-month period. Over the last
months, however, prices have given more intra- and inter- What does this mean for farmers?
back 25% of those gains. seasonal volatility Less predictability makes it difficult
While futures price volatility poses Basis levels shift from one year to the to pinpoint sales and storage deci-
greater risk for farmers selling grain next (interseasonal) based on supply sions. If you’re hedging or using
at the elevator, the increased risk in and demand shifts at a local level, options to manage price risk on the
basis levels arising over the last few while within-year (intraseasonal) Board, then having a good estimate
years is less apparent. variation also depends on the same of your basis when you sell grain is
factors, plus storage costs. important. These days, predicting
basis risk increasing Both intra- and interseasonal basis is not so simple, which opens
Basis, the difference between local variation have increased in the last farmers up to more risk.
cash prices and futures prices, is the five years. For example, the U.S. aver-
key pricing mechanism for local age corn basis generally had a 20¢ local market
markets. While futures prices gyrate range over the course of a season. fragmentation
tick by tick, grain merchandisers, But in recent years that range has Ethanol plants have been a boon to
farmers, and end users of grain mar- expanded to 35¢. U.S. grain farmers, but they also have
ket their grain on basis and generally In addition, it’s getting harder changed the landscape of local grain
expect basis levels to be fairly stable. to predict what basis will be from pricing.
In recent years, several funda- one year to the next. For example, Ethanol plants have sprung up like
mental shifts in grain markets have at harvest in central Illinois, corn dandelions, creating price bubbles.
altered basis. These changes have not basis has ranged by as much as 30¢ Normal grain shipping patterns have
only increased basis risk for farm- a bushel from one year to the next been altered. Premium markets, in-
ers, but are also giving farmers more over the last five years. Prior to that, cluding river terminals, feedlots, and
opportunities. the normal range was more in line
with 20¢.
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