Basis will follow spreads, up or down

Basis will follow spreads, up or down. As always, read at your own risk.

Basis follows futures spreads. Its something I’ve learned from friend Phil Luce and associates at White Commercial Corporation. Tracking spreads and basis in my local markets is something I started recently. Its been worthwhile and helps me develop my market bias. Merchandising and grain marketing is a constant teacher. I’m always learning more about merchandising and aim to pass some on to you.

Market structure is the disposition and relationship of different futures contracts in a crop year.

When nearby futures months are lower than deferred months the market structure is in a carry. Picture below is carry market structure in 17/18 of a Nebraska corn processor.

If nearby futures months are higher than deferred months market structure is inverted. Picture below shows an inverted soybean market and basis bids a Iowa soybean processor.

If nearby futures contracts are relatively the same values one may call that market structure, flat. If the market structure is inverted or flat basis does not have to improve. Picture of a flat market structure of the 14/15 soybean market and basis bids of a soybean crush

If the market structure has carry then basis will typically improve through the year but doesn’t have too. If the market structure is inverted or flat basis does not have to improve. The charts below shows two major corn markets for corn in Nebraska and Iowa respectively. In the charts, the futures market structure is in a carry but demonstrates that corn basis can go down in a carry market. In 19/20, when the coronavirus lockdowns hit, the lockdowns shocked the ethanol markets and basis markets crumbled with it. Look at the May timeframe in both charts.

Now futures spreads and local demand markets are dynamic, always changing, so reader beware. Many will call 19/20 an outlier, especially with the coronavirus hitting, but one must be aware of demand shocks to local demand markets. Basis doesn’t always have to get better even in carry markets. Until recently soybean spreads were mostly inverted, now we’re seeing small carries being built.

I’ve done the research, most of the time basis does not defy gravity in flat to inverted markets. Gravity meaning appreciate in values. In carry markets gravity is a little lighter and you’ll see basis appreciation as the market reward somebody to hold grain, but not always.

Below is the current soybean market structure and 4 locations in my local market. This market structure is what I call flat. There was the typical basis improvement after harvest, basis has been pretty flat. Seen some improvement in the last week with F/H spread widening out to a 5 cent carry.

Below is corn market structure. Slight carry, with some basis appreciation.

Listen, this info is common knowledge among merchandisers but I wanted to pass it along to this audience.

I got to jump, but I aim to do so more writing this winter, do me a favor, if you find value here, share this newsletter with a friend, ask them to subscribe. There are 450+ subscribers here. If I don’t bring value, don’t share. Many Thanks. -cw

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Cullen Wilson is a grain merchandiser and an assistant general manager in the grain industry that resides in Yankton, SD.  Grain Marketing Stack is a side project where Cullen proposes valuable topics to farmers, grain marketers, and merchandisers. The opinions stated in this newsletter are not that of his employer or affiliates. You may contact him at cullenjwilson@yahoo.com . Follow him on twitter @cullenjwilson

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