Slow Farmer Selling Frustrates Elevators’ Acquisition of Corn and Soybeans

Tanner Ehmke

November 14, 2023

• After two years of inverted futures markets, a global abundance of corn and soybeans has significantly improved the profit outlook for elevators storing grain. They are able to buy cheaper basis and benefit from bigger carries in futures markets. 
• Farmers, though, have been reluctant to sell, as corn and soybean prices have fallen sharply from their peaks earlier this year, frustrating merchandisers’ efforts to take ownership. 
• With farmers reluctant to sell at current prices, some elevators are making up for their shorter grain position by charging higher rates on storage or utilizing delayed pricing, or DP, which allows farmers to deliver grain to the elevator and price the commodity later. 
• For elevators using DP to acquire corn and soybeans now, monthly DP rates should be adequately priced to account for the greater financial risk to the elevator of selling bushels that are not yet priced by the farmer. 
• The wildcard that could return futures markets to an inverse and tighten basis is exports. U.S. corn and soybean exports could be awakened by a poor Brazilian harvest, a continued resurgence of Chinese demand, a return to more normal water levels on the Mississippi River, and weakness in the U.S. dollar. 

Introduction

In a world market awash in grains and oilseeds, the profit outlook for storing corn and soybeans in the U.S. is much improved for the 2023-24 marketing year with buy basis for elevators falling to more normal levels and with carries returning to futures markets.

The prior two years of market inversions in grain and oilseeds challenged many elevators to make a profit for their grain divisions. In some regions, basis has fallen to multi-year lows, creating opportunities for elevators to potentially make significantly larger margins compared to prior years. Farmers, however, are reluctant to sell as they are flush with cash from last year’s record income and dissatisfied with low prices. This has left elevators owning lower-than-desired amounts of bushels needed to take advantage of the wider carries and basis levels.

For elevators that have been able to gain ownership of bushels, the transition to a more normal carry market could be an awkward shift for some merchandisers following two years of actively trading freight and selling commodities in an inverted market. In a carry market, elevators are instead incentivized to store grain rather than sell it.

Other elevators have been able to make up for some lack of ownership via storage fees and by offering delayed pricing, which allows farmers to deliver grain when it is convenient, surrender title upon delivery, and price it later – with many elevators charging record high rates. DP and storage programs have become popular as farmers await a rally in futures prices and/or local basis. Farmers are expected to sell heavily on rallies after the New Year as they convert crops to cash to pay for rising input costs, land rents and operating loans with high interest rates.

Supported by strong domestic demand for corn and soybeans, basis is expected to appreciate over time. Cheaper transportation rates – particularly with railroads – plus strong end-user demand among livestock feeders, ethanol plants and soybean crushers will also support the basis. The combination of slow farmer selling and strong end-user demand is expected to send basis higher into January, February, and March. Prices above $5.00/bushel for corn and $14/bushel for soybeans should compel farmers to sell, limiting upside potential in basis appreciation compared to recent years.

The performance of the U.S. corn and soybean export program, though, could impact the basis and carry outlook. Another record South American crop would cause basis and carries to widen in the U.S. as global demand shifts to Brazil and Argentina. Elevators would face potential downside risk on hedged company-owned grain with sell basis falling sharply under such a scenario. But, a disappointing South American crop, a surprise resurgence of Chinese demand, a return to more normal water levels on the Mississippi River, and weakness in the U.S. dollar could awaken dormant U.S. exports, resulting in tighter basis and narrower spreads in futures – and a potential return to an inverted market.

Wet harvests and high costs of carry in today’s high interest rate environment complicate grain elevators’ ability to store commodities. In some regions that saw substantial rainfall during harvest, test weights on grain will be lower and foreign matter will be higher, increasing blending costs and losses to shrink. Elevators in affected regions, though, will also benefit from higher drying revenue.

Corn and grain sorghum

Farmers are nearly finished harvesting what is expected to be the biggest U.S. corn crop on record at 15.234 billion bushels, up 11.1% YoY, according to USDA. Production of grain sorghum, which competes with corn for feed and ethanol demand, is estimated at 322 million bushels, up 71.3% from last year’s dismal harvest.

The substantial increase in production of both crops at a time when Brazil is competitive in the world market with record corn exports has brought carries back into the futures market while widening basis in the U.S. interior – a more normal market environment than the prior years of market inversion. The world corn stocks/use ratio excluding China, which has substantial stockpiles of non-tradable bushels, is figured to rise to 9.4% for the 2023-24 marketing year – the highest in four years following Brazil’s record corn harvest.

The substantial supply of bushels on the world market is weighing on both futures and basis. In the absence of a rally in futures, movement in basis will be required to pry bushels from farmers’ hands. The likelihood for a smaller South American corn crop as Brazilian farmers’ shift to growing soybeans translates into stronger export demand for U.S. corn later in the marketing season.

Strong Chinese demand for sorghum has lifted sorghum basis to a premium to corn. Should Chinese demand falter, sorghum basis faces substantial downside risk as it will compete with corn to earn more demand from ethanol producers and livestock feeders.

End-user demand for corn in the U.S. remains strong with livestock feeders and ethanol plants both bidding aggressively. With ethanol producers making historically strong margins, ethanol demand in particular is expected to continue growing and putting upward pressure on local basis. The bigger corn harvest, though, will limit basis appreciation to more moderate levels compared to years prior.

In the Western Corn Belt where states like Nebraska and Iowa experienced crop losses from heat and drought, basis faces more upside risk. The record yields and ample harvests in the Eastern Corn Belt states of Indiana and Ohio, though, will allow bushels to move west and cap basis rallies in the west. The movement of bushels westward will be further aided by cheap rail freight.

Soybeans

The smaller soybean harvest this year of 4.129 billion bushels, down 3.3% YoY, combined with record processor demand has put a stronger floor under soybean basis relative to corn. Strong processor margins have been supported by growing demand for soybean oil for renewable diesel and a record export pace for soybean meal in the absence of Argentine exports.

Farmers have been more willing to sell soybeans than corn. Soybean prices are holding at relatively stronger levels; profitable crush margins are giving processors capacity to pay more for basis amid tighter U.S. supplies. The potential return of a more robust export program in the absence of a strong South American harvest would result in a quick tightening of basis as processors bid aggressively to keep soybeans at home. The world soybean stock/use ratio excluding China currently is expected to rise to 15.8%, the highest in five years.

The narrow window to export soybeans before the arrival of the South American harvest in late February and early March raises the risk for owning soybeans. The biggest risk for elevators that own soybeans is a significant drop in basis if South America produced another record crop. With soybeans’ higher value, it’s a more expensive crop to own with high borrowing costs.

Outlook

With farmers holding extra cash from the previous marketing year, they have been reluctant to sell in a market with widening basis and drop in futures prices. Rising prices of inputs like fertilizer, higher land rents, and higher borrowing costs, though, are expected to force farmers to sell in January, February, and March to generate the cash needed to cover the higher expected costs associated with planting the 2024-25 crop.

Farmers are also expected to be heavy sellers on rallies in the cash market over $5/bushel for corn and $14/bushel for soybeans, which would likely cap any rallies in basis. If farmers need cash to cover input costs, pay down bank notes or make land rent payments, farmers would be more willing to sell soybeans before the arrival of the South American soybean harvest, but continue to store corn hoping for higher prices.

For elevators not gaining ownership amid farmers’ reluctance to sell, monthly DP rates should be adequately priced to make up for the opportunity cost of not benefiting from wider buy basis and bigger carries in the futures markets while DP bushels take up space in the elevator. Selling unpriced DP bushels in a carry market, though, comes with higher risk to the elevator as basis could tighten after the elevator sells the bushels to make space. DP service charges, therefore, need to be priced to offset the higher basis risk and potential losses on basis.

Chinese demand could suddenly appear for corn, continue to increase for soybeans, or disappear for grain sorghum. South American production may falter amid ongoing weather woes, particularly in Brazil. A short South American crop would narrow futures spreads considerably and fall below the cost of carry, thereby incentivizing elevators to sell soybeans. A material drop in the value of the U.S. dollar could also awaken U.S. exports, prompting a reversion back to inverted markets and a rapid tightening in basis.

Conversely, with Brazilian soybean acreage expected to be up 4%-5% YoY, a return to normal weather would produce record Brazilian harvests. This would shift Chinese demand to Brazilian origin and cause basis and carries to widen in the U.S. The risk to elevators in that scenario would be a decline in sell basis, resulting in tighter or even negative margins, particularly for soybeans.