Understanding Corn Basis in Overs

• July corn futures continues to trade near the high end of its historic price distribution range, a situation that could lead to basis weakness if bushels were available. 
• Some of this week's rally in corn futures has come from noncommercial short-covering after this group added nearly 90,000 short futures contracts from March through May.
• The bottom line in corn is the market's fundamentals are far more bullish than official reports would have the industry believe. 

During my Wednesday appearance on RFD-TV, as always sponsored by my friends here at Barchart, host Marlin Bohling mentioned something interesting to lead off our discussion on the corn market. Marlin said something to the effect, “Traders are just now realizing remaining old-crop bushels are being held in tight hands.” Of course me being me, I quickly reminded him this is what I’ve been saying since the early 2022 rally in the market sparked larger than usual first of the year cash sales. The market, through its futures spreads (at the time March-May and May-July) were telling us grain merchandisers were concerned about sourcing supplies by late April, possibly having enough until mid-May. And as usual, the market was right. 

Recall previous conversations about Grains’ Golden Rule. Tregg Cronin, a friend of mine who has played a number of roles in the industry, used to give talks on this simple subject that states, “First basis, then futures spreads, then futures”. We know corn futures are trading in the high end of the market’s price distribution range, with July priced near $7.80 putting it in the upper 2% based on weekly closes only (July futures) dating back through the 2012 contract. While some of the recent support has come from noncommercial short-covering, after this group built a short futures position of nearly 148,000 contracts, much of the buying continues to come from commercial traders.

Even though the September futures contract is a hybrid old-crop/new-crop issue[i], the July-September futures spread has seen its inverse strengthen to more than 45 cents. This confirms the idea I’ve talked about a number of times in this space, merchandisers are fighting for supplies to meet all three legs of corn’s domestic demand stool (feed, ethanol, and exports). Live cattle future spreads continue to tell us there are a lot of cattle on feed while still strong demand for gasoline also calls for more ethanol to be produced. As for exports, the latest weekly sales and shipments update showed the US on pace to ship 2.47 bb, with merchandisers still needing to find roughly 130 mb.  

And that’s where basis comes in. I’ve been getting updates from all across the US about local corn basis ramping up as we head deeper into summer. Given this, I was not surprised by the Barchart National Corn Basis Index (weighted national average basis) coming in at 0.6 cent over July futures Wednesday afternoon. Yes, you read that right, the Barchart National Corn Price Index (weighted national average cash price) came in above July futures. In fact, the NCBI is closing in on the incredibly basis market posted during 2020-2021, and rightfully so given my end of May calculation of US available stocks-to-use (based on the marketing year daily average of the NCPI) was 8.2%. Last month it was 8.4%, while the end of the 2020-2021 marketing came in at 9.6% (Oddly enough, USDA’s May supply and demand estimates resulted in an ending stocks-to-use for 2021-2022 marketing year of 9.6%. So I guess we can say USDA is only 9 months behind.)

[i] This year, due to the slow planting pace the 2022 September issue will most likely be viewed as an old-crop contract.