High prices for grain on the boards of trade don’t necessarily show up at local elevators. Farmers harvesting record yields this fall are finding cash prices well below futures prices, says Melvin Brees, University of Missouri economist.
“The price difference is not a grain market collusion; it is simply supply and demand,” he says, grain marketing specialist at the MU Food and Agricultural Policy Research Institute (FAPRI).
The futures price on the Chicago Board of Trade is an offer for grain at some future time and at a specified delivery point. The local cash price is an elevator’s signal for how much grain they want, or don’t want, today, Brees says.
Farmers are seeing a dollar, or more, price differential, or basis, for a bushel of soybeans, Brees says. Market basis is the difference between the price on the board of trade and the price at the local elevator.
“With record harvests coming in, local elevators can’t handle much more grain,” says Brees. “If an elevator buys more grain than it can store, it must start piling that grain on the ground, which increases their risk.”
One traditional measure of basis is how much it costs to move grain from a local elevator to market in Chicago.
“Today, there are higher freight costs to move grain,” Brees says. “Fuel costs are higher, which makes trucking less attractive.” At many locations, there is greater competition for rail cars to move dry commodities, and there is greater competition for barges to move grain on the rivers.
“All of those things push cash bids down,” Brees says. “Even with the dollar drop in basis, most commodity prices are at historically high levels.”
In the last 20 years, corn has been higher in only 10% of the months. Soybeans have been higher in only 4% of the months.
“Wheat is at record prices and has been higher zero percent of the time.” Brees says.
On Sept. 11, basis differentials from Glasgow in central Missouri to the Chicago Board of Trade (CBOT) were: corn cash bid, $2.99/bu. and CBOT Dec. '07 contract $3.41 for a minus basis of 42¢; soybeans, cash $8.21, CBOT, Nov. '07, $9.05 for minus basis of 42¢; wheat cash $7.61, Chicago, Dec. ’07, $8.90, basis minus $1.29.
While local elevators face grain gluts at harvest time, traders in futures contracts in Chicago or Kansas City look at a bigger picture of worldwide trade.
“Wheat is a food crop in short supply around the world,” says Bres. “Drought in Australia greatly reduced their exports. We will be exporting as much as we can.”
By world standards, the U.S. is not a major player in the wheat trade. “About everyone in the world can grow wheat,” Brees says. “Somewhere, someone will be harvesting wheat 10 or 11 months of the year.”
When it comes to corn, the U.S. Corn Belt dominates the world market. However, corn faces increased demand from ethanol producers and from livestock feeders at home.
“As soon as elevators get the harvest glut into storage, ethanol plants and livestock feeders will have to bid to get it out,” Brees says. If wheat supplies stay short and prices continue up, no wheat will be fed to livestock, causing added corn feed use. That will pull corn prices upward, as well.
U.S. farmers are major players, but not dominant, in soybean production. South America is a large competitor and soybean prices depend on how Brazilian growers respond to these prices.
“Futures traders see growing demand and possible short supplies in years ahead,” says Brees. “Three crops – corn, soybeans and wheat – will be competing for acres.”
Futures prices will help farmers decide which crop to plant next season.
“As we go into the winter and spring, markets will still be bidding for acres,” Brees says. “I mean, these are good prices. When soybeans are over $9/bu., you don’t usually get those prices at harvest time.”
Each producer will have to look at the futures price, then calculate a budget for their own farm, based on their own costs, says Brees. “For now, pay attention to what the market will give for that crop.”
Producers can check both daily cash bids for their area and all futures contracts on the boards of trade on the MU Extension Commercial Agriculture’s Agricultural Electronic Bulletin Board (AgEBB). Go to http://agebb.missouri.edu/mkt/index.htm, then, click on “Missouri cash grain bids” for cash bids and “commodity quote settlements” for futures prices.