NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

October 22, 1998

The Market Advisor: Poor Basis Signal to Store

George Flaskerud, Extension Crops Economist
NDSU Extension Service

A poor basis is a signal from the market to store. Local cash prices relative to the nearest futures prices are poor for spring wheat, corn and soybeans. Any sales that are made should be for delivery at a later time. The marketing tool to use in this case would be the hedge-to-arrive (HTA) or futures-fixed contract. In this contract, the basis is left open until some later time. The basis can be fixed in the HTA contract anytime between the time the contract is initiated and the time of delivery.

A return of the wheat basis to a more traditional level by April could mean about a 30-cent increase in the wheat price. For corn, the increase could be 40 cents, and for soybeans, the increase could be 25 cents. The probability is low that basis levels would strengthen that much by April, but the probability is quite high that the basis will not weaken further. Those odds make the HTA contract a better alternative than the cash sale.

When to initiate the HTA contract is the key question. Wheat, corn and soybean markets are up considerably from early September lows. Strength came from anticipation of a Russian donation program, as well as a friendly USDA Supply and Demand Report in October. The soybean crop was much smaller than expected, and the corn crop was at the low end of trade expectations.

The market appears to be waiting to see what happens to the Russian donation program. If that is the major factor, then it is important to see the makeup and level of donations before making a decision about how much to sell. Watch for opportunities to make significant HTA sales, especially in wheat.

The level of ending stocks projected by USDA is burdensome for all three commodities. At the end of the 1998-99 marketing year, ending stocks are projected to be 37 percent of total use for wheat, 18 percent for corn and 15 percent for soybeans. Any donation program would have to be substantial to make a dent in these stocks-use ratios.

An increase of 200 million bushels in the disappearance of wheat would reduce the stocks-use ratio to 26 percent. That is about where the ratio was a year ago when the December Minneapolis wheat futures price averaged about $3.80 during November. The December contract closed at $3.59 on Oct. 20 this year. The December price is up from a low of $3.13 on Sept. 11, but down from a recent high of $3.71 on Oct. 9.

An increase of 400 million bushels in the disappearance of corn would reduce the stocks-use ratio to 13.5 percent. That is about where the ratio was in 1993 when the December corn futures price averaged about $2.50 during October. December closed at $2.19 on Oct. 20. The December price is up from a low of $1.97 on Sept. 1, but down from a recent high of $2.31 on Oct. 16.

An increase of 100 million bushels in the disappearance of soybeans would reduce the stocks-use ratio to 11 percent. That is about where the ratio was in 1993 also, when the November soybean futures price averaged about $6.15 during October. November closed at $5.51 on Oct. 20. The November price is up from a low of $5.08 on Sept. 1, but down from a recent high of $5.70 on Oct. 9.

###

Source: George Flaskerud (701) 231-7377

Editor: Tom Jirik (701) 231-9629