Focus on Ag: Challenges with marketing grain

Kent Thiesse
Farm Management Analyst and Vice President, MinnStar Bank
Kent Thiesse

Many farm operators will tell you that making grain marketing decisions is one the hardest parts of farming. This is especially true during times of highly volatile markets, such as have been occurring in recent months.

Earlier this year, the futures trading limits on the Chicago Board of Trade increased to $0.40 per bushel for corn and $1.00 per bushel for soybeans. This can result in wide swings for both current grain market cash prices and “new crop” prices that are being offered for the 2021 corn and soybean crops.

Both corn and soybean prices rose significantly in late 2020 and early 2021, which has improved the overall profitability projections for Upper Midwest grain producers for 2021.

The rise in both the CBOT prices and the local cash grain prices have been driven by a combination of grain stocks adjustments by the U.S. Department of Agriculture, lower than anticipated U.S. corn and soybean production in 2020, lower than expected 2021 crop acreage and very strong export demand for both commodities.

In fact, some analysts have suggested that both corn and soybean supplies for end users in portions of the U.S. could get very tight by late summer this year before 2021 commodities are available. The growing drought area in the western Corn Belt and some production reductions in South America have also added to the somewhat “bullish” nature of the commodity markets in recent months.

Nearby CBOT corn futures, which affect the cash corn prices, were trading just above $4.00 per bushel in early November of 2020 before rising to above $5.00 per bushel by mid-January of 2021, and then reaching levels above $7.00 per bushel by mid-May.

Since that time, nearby corn futures have basically traded in a sideways to downward pattern, with conservable volatility day to day. The nearby CBOT corn futures had declined to just above $5.30 per bushel by mid-July, which is almost a $2.00 per bushel drop in the corn futures market in a two-month period since mid-May.

Local grain elevators, ethanol plants and processing plants generally set their bid prices based off the CBOT futures price for a corresponding month. The difference between the local cash price offered in a given month and the closest CBOT futures price is known as “basis”. The basis levels for both cash corn and soybeans have been at fairly tight levels for several months. In fact, there has been a strong positive basis for corn in the past few months at many processing plants and local elevators in the region. The soybean basis has also been at positive levels from time to time. This situation does not occur very frequently in southern Minnesota.

For example, basis levels for 2020 corn that is still being sold has been above the corresponding CBOT futures prices during most of May, June and July in southern Minnesota, reaching as high as a positive basis of $0.50 to $0.80 per bushel. Soybean basis levels at regional processing plants has been positive by $0.20 to $0.30 per bushel on many days.

In the past five years (2016-2020) prior to 2021, similar basis levels in May and June in southern Minnesota for corn ranged from $0.15 to over $0.20 per bushel under CBOT prices. Similarly, soybean basis during the late spring and early summer months during those years ranged from $0.40 to $0.60 per bushel under CBOT futures prices at processing plants and an even wider basis at local grain elevators.

The last time there was an extended positive local basis in southern Minnesota, such as we are seeing in 2021, was in the late spring and early summer in both the drought year of 2012 and again in 2013.

However, in both years the positive basis levels had disappeared by mid-late summer, returning to more typical basis levels for the region by the time the crop was harvested.

It is important for producers to remember that tight basis levels at local grain elevators and processing plants are mostly driven by local demand for corn and soybeans. Once that demand is met, basis levels tend to widen back to more typical levels. Paying attention to basis levels and understanding the factors that affect basis can play a big part in the success of a farm grain marketing plan.

Generally speaking, when there is a positive or extremely tight basis level for cash corn and soybeans, such as has existed in recent months, farmers should take advantage of those opportunities to market any remaining unpriced corn or soybeans that are still in storage. The nearby CBOT corn or soybean futures price could stay steady, but if the basis at the local grain elevator or processing plant widens by $0.50 per bushel, the cash price to the farmer will be $0.50 per bushel less than they could have received.

This widening of the basis generally occurs as the season progresses closer to harvest, especially in an average to above-average production year in a given area. While to a non-farmer, $0.50 per bushel widening of the basis may not sound that significant, that amount represents $50,000 on a grain bin with 100,000 bushels of unpriced corn. This may have made up a considerable portion of the profit margin for the 2020 or 2021 corn crop.

A significant number of farmers had already sold all of their 2020 soybeans and most of their corn prior to the rapid rise in both cash corn and soybean prices in the spring and early summer of 2021.

In early Summer 2020, “new crop” prices were near $3.00 per bushel for corn and $8.25 per bushel for soybeans. In addition, there was a lot of uncertainty in the grain markets due to the ongoing COVID-19 pandemic, sporadic export markets and potential political changes at the federal level.

So, when cash soybean prices reached $9.00 to $10.00 per bushel after harvest, which was the highest local cash price in recent years, many farmers in Southern Minnesota sold all of their 2020 soybean crop.

Similarly, when the cash corn price in 2020 went from below $3.00 per bushel in mid-summer to over $4.50 per bushel by early January of 2021, many farmers sold all or a significant portion of their 2020 corn crop. Farmers that were fortunate enough to still have unpriced 2020 corn stored on the farm this spring have been able to sell their corn at the increased prices in recent months.

For many farmers, the major marketing focus in the past couple of months has been to lock-in prices on the corn and soybeans that are being grown in 2021. The new crop CBOT December corn futures rose from near $4.50 per bushel in mid-January to near $6.00 per bushel by early May, before declining to $5.50-$5.80 per bushel in most of July. Local ethanol plants and grain elevators in southern Minnesota were offering forward contract corn prices for the 2021 crop near $5.50 per bushel several times since mid-May. The bids for 2021 new crop corn during the mid-summer are among the highest since 2013. In recent weeks, there have been several daily swings both up and down of $0.20 to $0.40 per bushel in nearby corn futures prices, which can make day-to-day grain marketing decisions very difficult at the farm level.

Prices for 2021 CBOT November soybean futures, which are used to determine local cash bids for soybeans at grain elevators and processing plants, have also improved substantially in recent months. November futures opened the year trading between $11.00 to $12.00 per bushel in much of January and February before rapidly rising to a peak of over $14.00 per bushel by early May. Since that time, November soybean futures basically have traded between $13.00 to $14.00 per bushel through late July.

Forward contract bids for 2021 soybeans at processing plants in southern Minnesota rose above $12.00 per bushel by early March and continued to increase to near $14.00 per bushel by early May before reaching price levels near $13.50 per bushel in most of July.

In addition to the other grain marketing factors that a farmer must consider, weather and production are also part of grain marketing decisions. A producer likes to make sure that they will have the bushels to sell before they forward contract the grain from the crop in the field. This can be difficult in a year such as 2021, when very hot, dry conditions are causing drought concerns that could potentially have a big impact on crop yields.

This has made it difficult for farmers to lock-in prices on a high percentage of the anticipated 2021 production during a period when we had some of our best new crop corn and soybean prices in many years. Most farmers try to have a grain marketing plan with target prices and sales in a given crop year, while utilizing crop insurance coverage to protect the bushels that are forward priced. Grain marketing decisions vary widely among farm operators, which can have a big impact on “bottom-line” farm profitability.

For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at (507) 381-7960 or kent.thiesse@minnstarbank.com, or visit www.minnstarbank.com.