Chicago Board of Trade Market News
Outlook: The outlook is that multiple factors could heighten volatility in corn basis this fall across much of the Midwest. Pressure on cash prices is initially expected as producers and local elevators deal with the storage of an abundant harvest, resulting in a weak basis. Such a development may not be overly concerning for U.S. producers who have the ability to carry their corn stock further into the future than competing corn growers in other global regions. That competition from regions such as South America and the Black Sea is anticipated to cap basis at U.S. ports through the first quarter of the crop year (September-November). Domestic cash prices during that same time period may also be weakened by factors such as reduced gasoline consumption and a decline in the ratio of DDGS prices to corn, and encourage many ethanol plants to limit their extended coverage. The domestic feeding industry may also purchase in a hand-to-mouth manner as meat and livestock prices become more erratic.
Pork exports that were rejected by China are expected to seek a home in the domestic U.S. market. Cattle prices recently escalated to such lofty levels as to slow beef consumption. Reduced cattle on feed placements may cause another attempted rally in beef prices, but pork and growing poultry supplies will be ready to act as substitutes. Competition from meat cuts can be reflected into more volatile livestock prices, which is the reason that domestic feed purchases are likely to remain more short-term than one would initially expect when corn prices are so low.
The development of full carry in futures contracts may also encourage corn end-users to purchase in a hand to mouth manner. After all, no one will want to buy a more distant contract and then ride it down as it becomes the nearby month. Such a perspective could well continue right through the calendar year. However, there it will become increasingly evident through time that the downside is limited in corn prices and the upside has enormous potential if negative developments should evolve in the next growing season. At that point, speculators will attempt to buy on a limited scale, but few will be willing to take the short side of the contract. Commercials will see this development and recognize that they need to extend coverage, and basis is then likely to strengthen beyond expectations. Pronounced swings in basis could occur in a relatively short six month time period.