other end users, have found com- to widen (weaken), while falling
petition for grain more intense, and barge costs will force basis to narrow marke T sTalemaTe
farmers have been the benefactor of (strengthen).
this local competition. The impact of barge-rate gyrations The divergence between grain futures
However, just because you farm has a direct impact on basis levels markets and the cash market is
30 miles from an ethanol plant within 200 miles of the river mar- curbing the risk-management role of
doesn’t necessarily mean you always kets. So even if you don’t necessarily futures-based contracts.
ship to that plant. The economics of haul your grain to the river, chances This lack of convergence in CBOT
grain hauling and the relative prices are you will feel the impact in your grain contracts (corn, soybeans, and
of your alternative market outlets local areas of changing barge rates. wheat) is significant. For example, the
will dictate to which market you Again, more reason to keep attuned average premium for CBOT wheat
should haul. to local pricing alternatives. has quadrupled in two years to 40¢ a
Sometimes it may be best to send bushel, compared with 10¢ the prior
loads to your nearest ethanol plant, higher rail fuel surcharges five years during the delivery period.
but other times it may be best to For rail-based markets, the costs The result is a weaker basis for
stay local. Ethanol plants tend to of moving grain are generally tied to farmers. In fact, the gap between CBOT
have limited storage. And depend- fuel costs, as railroads pass on higher futures and the underlying commodity
ing on their needs, the price that costs through fuel surcharges. is so great that some merchants have
they quote relative to their market Railroads have been offering lower quit bidding, preventing farmers from
competition may not be worth the pricing options for shuttle-train locking in deferred prices.
added hauling costs. (110-car trains) shipments. So larger
The bottom line is that mar- co-ops and grain merchandisers are no silver bullet
ket fragmentation means farmers taking advantage by building bigger In the last five months the CFTC,
need to closely monitor their local facilities to accommodate the larger chief regulatory body of the futures
markets to gauge the best pricing volume. industry, has met with exchange
opportunities. Shuttle facilities are somewhat a representatives, farmer organizations,
double-edged sword for farmers. and merchandiser groups to hash
changing transportation On the one hand, lower freight costs out this thorny subject. The general
economics mean a better basis for farmers. As consensus is that the situation isn’t a
Higher fuel costs seem to be a elevators continue to consolidate, result of high prices or a problem that
permanent fixture for grain hauling. however, that means farmers may would correct itself. Finding a solution
In addition, changing rail and barge have to haul grain further, thereby to satisfy all market participants is the
economics are impacting the local lowering their effective basis. goal, but what that is remains unclear.
basis markets. The dynamics of local basis may The exchanges seem reluctant
Barge rates, in particular, have change quickly, depending on to tinker with their grain contract
shown extreme volatility in recent whether a shuttle facility needs to delivery mechanisms and instead are
years. Along the Illinois River, barge acquire enough grain to meet a offering up other tradable contracts to
rates to the Gulf generally ranged 110-car shipment. Again, this is a circumvent risk. Grain basis swaps,
between 20¢ and 40¢ a bushel. boon for the observant farmers who a derivate product that would allow
However, in the last three years, stay in touch with their local market for regional options in basis risk
barge rates have topped out on two conditions. management, is the CBOT’s latest
different occasions at $1 per bushel new product offering. These contracts
(once during Hurricane Katrina). ethanol plants: great would provide cash grain traders
But the lows tend to be around 40¢ consumers, lousy storers with a more direct way to shift basis
per bushel. There’s no doubt that ethanol plants risk. But whether these will be widely
A 60¢ move in barge rates over have helped farmers. But they’ve adopted in the grain industry’s risk-
a short time period has an im- also changed the way farmers need management portfolio is unclear. In
mediate impact on grain basis at to manage risk in their grain the near term, farmers and cash grain
key grain terminals along the river. traders will have to live with it.
Higher barge rates cause grain basis
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