minnesota basis analysis - mda.state.mn.us/media/files/food/business/basisanalysis.pdf · minnesota...

Minnesota Basis Analysis

Final Report for the Minnesota Department of Agriculture

Prepared by Edward Usset Center for Farm Financial Management

University of Minnesota

July 10, 2014

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communication upon request by calling 651/201-6000. TTY users can call the Minnesota Relay Service at 711 or 1-

800-627-3529. The MDA is an equal opportunity employer and provider.

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Table of Contents

Introduction……………..…………………………………..……………………………………..…….2

Background……………………………………………………………………………………….……...2

Soybean Findings…………………………………………………………………………….….……..5

Soybean Findings at Individual Sites…………………………….…….……………….……….….9

Corn Findings………………………………………………………………………….…….…….…..24

Corn Findings at Individual Sites…………………………………………….……………..….......26

Hard Red Spring Wheat Findings…………………………………………………….……….……41

Hard Red Spring Wheat Findings at Individual Sites……………………………………..…….43

2

Introduction

During the winter and spring of 2014, transportation problems affected the shipments of grains

in Minnesota. These problems were reflected in lower cash grain bids. The purpose of this

report is to measure the impact on the basis (cash price relative to the futures price) and on the

value of Minnesota grains.

Daily cash basis and price data was purchased for elevators handling soybeans, corn and

wheat in the state of Minnesota (see table below). All of the elevators selected (15 for soybeans,

13 for corn and 7 for HRS wheat) are located on rail lines and offered a nearly complete data

set for the period starting September 2008 through late June 2014. Sights were also selected to

reflect geographic diversity in the state. For a cleaner comparison of the numbers, daily data

was converted to average monthly basis levels for each sight.

Background

Minnesota Markets for Basis Analysis

MN Agri Stat. Districts

Soybeans (city/market)

Corn (city/market)

HRS Wheat (city/market)

Northwest Ulen/West Central Ag (BN) Kragnes/Kragnes Farmers (BN) Barnesville/Agassiz Grain (BN) Greenbush/CHS (BN) Humboldt/Humboldt-St Vincent Elevator (BN)

Ulen/West Central Ag (BN) Kragnes/Kragnes Farmers (BN) Barnesville/Agassiz Grain (BN)

Ulen/West Central Ag /(BN) Kragnes/Kragnes Farmers (BN) Barnesville/Agassiz Grain (BN) Greenbush/CHS (BN) Humboldt/Humboldt-St Vincent Elevator (BN)

North Central NA NA NA

Northeast NA NA NA

West Central Madison/Cargill (BN) Fergus Falls/MN Farmers (BN)

Madison/Cargill (BN) Fergus Falls/MN Farmers (BN)

Fergus Falls/MN Farmers (BN)

Central Olivia/Coop Country Farmers (BN)

Olivia/Coop Country Farmers (BN)

Olivia/Coop Country Farmers (BN)

East Central NA NA NA

Southwest Pipestone/Cargill (BN) Jackson/Farmers Coop (CP) Marshall/CHS (BN) Tracy/CHS (CP)

Pipestone/Cargill (BN) Jackson/Farmers Coop (CP) Tracy/CHS (CP) Marshall/CHS (BN)

NA

South Central Delavan/Watonwan Farm Service (CP) New Ulm/MN Farmers Co-op of Hanska (BN)

Delavan/Watonwan Farm Service (CP) New Ulm/MN Farmers Co-op of Hanska (BN)

NA

Southeast Kasson Greenway Coop (CP)

Kasson Greenway Coop (CP)

NA

3

Basis, by definition, is the local cash price less the nearby futures contract. It is standard

operating procedure for the nearby contract to roll forward on the first day of the delivery month,

e.g. on March 1, the May futures contract replaces the March contract as the nearby contract.

As such, the nearby futures contract in corn and wheat is defined as follows for each of the

months:

Corn and HRS Wheat definitions of the nearby contract…

January and February: March futures contract

March and April: May futures contract

May and June: July futures contract

July and August: September futures contract

September, October and November: December futures contract

December: march futures contract

Soybean definition of the nearby contract…

January and February: March futures contract

March and April: May futures contract

May and June: July futures contract

July: August futures contract

August: September futures contract

September and October: November futures contract

December: January futures contract

Understanding Basis

In the grain trade, cash prices are usually quoted as so many cents "under" or "over" the futures

price. This difference between cash and futures prices is commonly known as the "basis."

Stated mathematically,

cash price - futures price = basis

$5.25 - $5.67 = -$.42 (or 42 cents "under")

In the grain industry, the practice of using basis quotes rather than the flat prices in their day to

day trading activities goes back over 100 years.

Basis is the link between the general price level (the futures market) and the cash price at some

specific location. Local cash prices reflect not only the general price level but also local

economic values. Key basis factors include…

1. Transportation costs and availability

2. Local supply and demand for the commodity

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3. Availability of local storage

At issue this winter was transportation availability. When grain handling facilities are not able

to secure transportation to move grain from storage, elevators fill and reduce their bids to

farmers to reflect either (1) higher costs for other forms of transportation, or (2) higher costs for

alternative forms of storage.

Selecting similar years for basis comparison and analysis

While basis is not perfectly predictable, years can be selected for comparison the feature similar

supply and demand features. An analysis was made of the soybean, corn and HRS wheat

markets to select the best years since 2008 for comparison to the current 2013/2014 crop year.

Key supply and demand fundamentals considered included the stocks/use ratio for U.S. crops,

Minnesota production in each year, and Minnesota grain stocks as of March 1 of each year. The

drought year of 2012 was eliminated for comparison in corn – this was an extraordinary drought

which led to extraordinarily high basis levels, particularly in the corn market. A brief discussion

of my selection process for comparison years for each grain follows.

Soybeans: The ending stocks/use ratio for U.S. soybeans for the 2013/14 crop year is currently

projected to be the tightest ever recorded (1.9 weeks of usage remaining as of the end of

August, 2014). Minnesota stocks of soybeans on March 1, 2014 were the smallest of all the

years considered (2008-2012), and the smallest since March 2004. Minnesota harvested a

slightly below average soybean crop in 2013. Crush and export demand has been very strong.

Based on the tight carryout situation and low Minnesota on-farm stocks in March, we would

expect very strong basis levels in Minnesota. Basis levels will be compared to an average of the

2008-09, 2009-10, and 2012-13 crop years – these years each had 2.3-2.4 weeks of soybean

stocks remaining at the end of each crop year. These were tight years, but not as tight as the

current crop year, and Minnesota on-farm stocks were much higher as of March in each of the

comparison years. In soybeans, there are no great years for comparison to the current situation,

but 2008, 2009 and 2012 are as close as we can get.

Corn: The ending stocks/use ratio for U.S. corn for the 2013/14 crop year is projected to be tight

and similar to the levels seen at the end of the 2010/11 and 2011/12 crop years. U.S. corn

stocks in 2008 and 2009 crop years were much higher. Minnesota corn production in 2013 is

similar to the level seen in 2010 and 100 million bushels higher than 2011, while on-farm corn

stocks as of March 1 were 60-130 million bushels less than 2010 and 2011. Basis levels will be

compared to an average of the 2010/11 and 2011/12 crop years.

HRS Wheat: The ending stocks/use ratio for U.S. wheat in 2013/14 crop year is the lowest

since 2007/2008 and lower than all years considered in this analysis. Ending stocks/use of HRS

wheat, however, is not as tight – the stocks/use ratio is modestly higher that all of the other

years except for 2009. Two years stand out; 2009 due to high ending stocks/use of all wheat

and 2010, which had the lowest stocks/use ratio in HRS wheat. Basis levels in 2013/14 will be

compared to an average of the 2008/09, 2011/12 and 2012/13 crop years.

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Soybean findings

1. While an average of the 2008, 2009 and 2012 crop years were used for comparison,

none of these years compared well to the tight stocks and strong demand of 2013/14

crop year, i.e. the estimate of lost revenues in soybeans is conservative.

2. High basis levels last fall were a carryover from the 2012 drought year.

3. Basis levels in the Northwest Minnesota Agricultural Statistic District were affected the

greatest – basis levels were 50-80 cents/bu. lower than comparison years (basis levels

of 150-180 cents under were common in March, April and May).

4. Basis levels in the South Central, Central and Southeast Minnesota Agricultural Statistic

Districts were affected the least, possibly due to their proximity to major crushing

facilities

As of March 1, 2014, USDA estimated that Minnesota farmers held 59 million bushels of

soybeans in storage. By the June 1 stocks report, that number was 12.5 million bushels,

indicating that Minnesota famers sold 46.5 million bushel of soybeans between March 1 and

June 1. Assuming an average loss of 40.5 cents per bushel, transportation problems cost

Minnesota soybean growers $18.83 million in lost revenues.

Estimated revenue loss to Minnesota soybean growers in the March – May period: $18.8

million

Basis levels vs. the previous four crop year average (price data from a Fergus Falls

elevator – 2008-2009 data was not available)

6

The average monthly basis from the previous four crop years shows a typical progression of the

basis over a crop year; basis is generally lowest (weakest) at harvest and increases

(strengthens) throughout the crop year. In 2013/2014, basis was stronger than usual in

September and October, a carry-over effect from the 2012 drought. After returning to more

normal levels in December and January, basis weakened dramatically from January to March.

The dramatic weakening of the basis can be attributed to rail problems experienced during the

winter. Basis levels currently remain below average.

7

Soybean basis impacts by region:

Basis levels in the Northwest showed the greatest impact, averaging 79 cents/bu. less than the

comparison years.

Basis levels in the central part of the state also showed a large impact – 37 cents/bu.

8

Basis levels in the southern tier showed the smallest impact. While an average of the 2008,

2009 and 2012 crop years were used for comparison, none of these years compare well to the

tight stocks and strong demand of 2013/14 crop year. For example, Minnesota on-farm soybean

in each of the comparison years ranged from 75-90 million bushels as of March 1, vs. just 59

million on March 1, 2014.

9

Soybean basis impacts at individual sites

Location and Minnesota Agricultural Statistical District: Marshall / Southwest

Firm and Railroad: CHS / BN

10

Location and Minnesota Agricultural Statistical District: Tracy / Southwest

Firm and Railroad: CHS / CP

Location and Minnesota Agricultural Statistical District: Fergus Falls / West Central

Firm and Railroad: Minnesota Farmers / BN

11

Location and Minnesota Agricultural Statistical District: Kragnes / Northwest

Firm and Railroad: Kragnes Farmers / BN

12

Location and Minnesota Agricultural Statistical District: Jackson / Southwest

Firm and Railroad: Farmers Coop / BN

13

Location and Minnesota Agricultural Statistical District: Kasson / Southeast

Firm and Railroad: Greenway Coop / CP

14

Location and Minnesota Agricultural Statistical District: Pipestone / Southwest

Firm and Railroad: Cargill / BN

15

Location and Minnesota Agricultural Statistical District: Ulen / Northwest

Firm and Railroad: West Central Ag / BN

16

Location and Minnesota Agricultural Statistical District: Delavan / South Central

Firm and Railroad: Watonwan Farm Service / CP

17

Location and Minnesota Agricultural Statistical District: Madison / West Central


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Location and Minnesota Agricultural Statistical District: Olivia / Central

Firm and Railroad: Coop Country farmers / BN

19

Location and Minnesota Agricultural Statistical District: New Ulm / South Central

Firm and Railroad: Minnesota Farmers Coop of Hanska / BN

20

Location and Minnesota Agricultural Statistical District: Barnesville / Northwest

Firm and Railroad: Agassiz Grain / BN

21

Location and Minnesota Agricultural Statistical District: Greenbush / Northwest


22

Location and Minnesota Agricultural Statistical District: Humboldt / Northwest

Firm and Railroad: Humboldt-St. Vincent Elevator / BN

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Corn findings

1. The 2010 and 2011 crop years were used for comparison to the current year.

2. High basis levels in September and October were a carry-over from the 2012 drought

year.

3. Like soybeans, basis levels in the Northwest were affected the greatest – basis levels

were 50-70 cents/bu. lower than comparison years (basis levels of 100-110 cents under

the nearby futures contract were common in March, April and May of 2014).

4. Basis levels along the southern part of Minnesota were affected the least, possibly due

to their proximity to ethanol plants.

As of March 1, 2014, USDA estimated that Minnesota farmers held 570 million bushels of corn

in storage. By the June 1 stocks report, corn held in on-farm was 330 million bushels. These

figures indicate that Minnesota famers sold 240 million bushel of corn between March 1 and

June 1. Assuming an average loss of 30 cents per bushel, transportation problems cost

Minnesota corn growers $72 million in lost revenues (240mb * $.30/bu.). In addition, poor basis

levels have carried forward into June – the basis remains 37 cents/bu. below comparison years.

Based on this figure, the remaining 330 million bushels held in on-farm storage is worth $122

million less.

Estimated revenue loss to Minnesota corn growers in the March – May period: $72 million

Basis levels vs. the previous five crop year average (price data from a Fergus Falls

elevator)

25

The average monthly basis from the previous five crop years shows a typical progression of the

basis over a crop year; basis is generally lowest (weakest) at harvest and increases

(strengthens) throughout the crop year. In 2013/2014, basis was very strong in September, a

carry-over effect from the 2012 drought. After returning to more normal levels in October

through January, basis weakened dramatically from February to March. The dramatic

weakening of the basis can be attributed to rail problems experienced during the winter. Basis

levels currently remain well below average.

26

Corn basis impacts by region


comparison years.

Basis levels in the central part of the state also showed a large impact.

27

Basis levels in the southern tier showed the smallest impact, probably due to the heavy use of

local corn in ethanol processing.

28

Corn basis impacts at individual sites:

Location and Minnesota Agricultural Statistical District: Marshall / Southwest


Location and Minnesota Agricultural Statistical District: Tracy / Southwest

Firm and Railroad: CHS / CP

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30



31

Location and Minnesota Agricultural Statistical District: Jackson / Southwest

Firm and Railroad: Farmers Coop / BN

32

Location and Minnesota Agricultural Statistical District: Kasson / Southeast

Firm and Railroad: Greenway Coop / CP

33

Location and Minnesota Agricultural Statistical District: Pipestone / Southwest


34



35

Location and Minnesota Agricultural Statistical District: Delavan / South Central

Firm and Railroad: Watonwan Farm Service / CP

36

Location and Minnesota Agricultural Statistical District: Madison / West Central


37



38

Location and Minnesota Agricultural Statistical District: New Ulm / South Central

Firm and Railroad: Minnesota Farmers Coop of Hanska / BN

39



41

Hard Red Spring Wheat findings

1. An average of the 2008, 2011 and 2012 crop years were used for comparison to the

current year.

2. Basis levels were 30-50 cents/bu. lower than comparison years.

As of March 1, 2014, USDA estimated that Minnesota farmers held 30 million bushels of HRS

wheat in on-farm storage. By the June 1 stocks report, wheat held in on-farm was 9.2 million

bushels. These figures indicate that Minnesota famers sold 20.8 million bushel of HRS wheat

between March 1 and June 1. Assuming an average loss of 41 cents per bushel, transportation

problems cost Minnesota wheat growers $8.5 million in lost revenues (20.8mb * $.41/bu.). In

addition, poor basis levels have carried forward into June, as the basis remains 18 cents/bu.

below comparison years. Based on this figure, the remaining 9.2 million bushels held in on-farm

storage is worth $1.7 million less.

Estimated revenue loss to Minnesota HRS wheat growers in the March – May period: $8.5

million

42

Basis levels vs. the previous four crop year average (price data from a Greenbush

elevator)

The average monthly basis from the previous five crop years shows a typical progression of the

basis over a crop year; basis is generally lowest (weakest) at harvest (August and September in

spring wheat) and increases (strengthens) throughout the crop year. In 2013/2014, basis was

showing a near average pattern through January. The basis then weakened dramatically from

January to March. The dramatic weakening of the basis can be attributed to rail problems

experienced during the winter. Basis levels currently remain below average.

43

HRS wheat basis impacts by region


comparison years.

Basis levels in the central part of the state also showed a large impact.

HRA Wheat basis impacts at individual sites:


44




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46



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48

Location and Minnesota Agricultural Statistical District: Greenbush / Northwest


49

Location and Minnesota Agricultural Statistical District: Humboldt / Northwest

Firm and Railroad: Humboldt-St. Vincent Elevator / BN

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