U.S. corn farmers are receiving conflicting signals from the cash and futures markets on whether to sell or store their grain.
On the one hand, firm cash basis levels seem to suggest that corn demand is in better health than the futures market may imply, and could be a sign that growers should lock down basis-tied sales contracts sooner rather than later. On the other hand, higher deferred futures prices suggest farmers may be able to benefit from carrying the grain in private storage until later in the crop year before seeking out higher sale prices than are available currently. Fortunately for confused growers everywhere, however, following a bit of both strategies may be the right move.
One of the defining narratives of the corn market in 2011 has been the enduring solidity of consumption interest even as prices scaled record-high levels. Robust margins for ethanol manufacturers and solid off-take from animal feeders, thanks to strong meat and livestock prices, ensured steady demand for the grain throughout the year.
Indeed, in a rare occurrence, cash market prices exceeded futures values in several key regions to supposedly illustrate that the 2011 corn rally had solid physical market foundations that helped differentiate it from the predominantly speculative-driven 2008 rally.
However, that robust cash market interest proved fickle and fragile earlier this fall as basis levels as well as cash prices quickly collapsed in line with futures values amid the broad macroeconomic risk reduction seen in September.
The fact that basis levels dropped in line with cash prices refuted suggestions that the September dip was purely a speculative-driven phenomenon tied to the general shedding of investment risks that would not affect genuine corn end-users, and highlighted how closely tied end-user demand remains to broader market sentiment.
Nonetheless, basis strength has re-emerged in recent weeks as the cash and futures markets alike recovered from their September slumps. This recovery in basis and cash price levels may be a welcome reprieve for corn farmers who will have been scared by the sharp slumps seen only a few weeks ago.
But it should also be a call to action for those who have not yet lined up some sales deals for their newly harvested crops, and are ruing not having sold some earlier in the summer.