Ethanol plants need to lock in their supply well in advance. This has drastically changed the grain marketing environment in just a year's time.
This is especially true near the convergence of Nebraska, South Dakota, Minnesota and Iowa. But even with the tremendous increase in corn usage, there are still many challenges and major marketing decisions to be made. Don't assume that marketing will now be much easier because ethanol plants are raising the price of corn.
With the increase in ethanol plants, almost everyone is seeing a strange twist in basis levels. Now, your best basis levels may very well occur on further out contracts. This makes little sense compared to past price patterns. But when you think where the industry is headed, it does start to make sense.
This year is a good example. Basis levels in northern Iowa and southern Minnesota are wide, even by historical comparisons. Producers who held onto old-crop corn are going to be penalized for hanging on. The reason — as early as last winter many ethanol plants had booked most of their corn needs through this fall.
A relatively large percentage of ethanol plants have a good portion of their corn needs booked for the next several months and some all the way into 2008. Two years ago producers would never have thought of making sales that far out. Why now?
My guess is with a large carrying charge available in corn futures, it's been easy for merchandisers to offer producers a flat price contract months in advance at a better price than they can currently get. This has been an incentive to be much more aggressive on forward sales than producers have ever been in the past.
Therein lies the reason for an unanticipated trend in basis levels. With so many producers committing corn to ethanol plants in advance, these plants won't likely have an immediate need for corn — especially this fall. If the needs are already booked, why would a plant “bid up” the basis to get more? The result will likely be better cash prices than the past, but basis levels below what many producers expect.
With the surging capacity expansion in the ethanol industry and increasing export demand, the market is now confronted with the prospect of multiple deficit years and needs to find a price level to mitigate the expanding demand base.
The habit of selling the carry and forgetting about marketing the rest of the year is probably no longer wise.
Locking in basis contracts rather than forward cashing the flat price will most likely lead to better maximization of marketing profits. Marketing decisions are growing more complex — not less.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.