About This Episode
A midweek June 3, 2020 conversation between Chris Barron and Duane Lowry about July basis contracts. A lot of the corn sold over the previous 30 to 60 days was priced on basis only, with futures left open in hope of a price recovery that has not arrived. Corn has been sideways for almost two months, with a contract low of $3.09 and a top around $3.31. The market got close to that top the previous Thursday and has traded poorly since.
The choice is price it or roll it, and both carry a cost. Rolling to December means absorbing a spread of about 14 cents, which was out to 19 cents a few weeks earlier and can easily go back to 18 or 20. There is also a seasonal tendency for that spread to weaken from about June 15 forward, with the exception being a genuine weather storyline. That argues for being one of the early rollers rather than one of the last.
The other risk is crowding. It feels like a record number of bushels are sitting on unpriced basis contracts, that fact is widely known and being talked about, and the trade tends to go after blood in the water. The May contract traded down to $3.00 before it expired, roughly 23 cents below where July sits. If a producer prices now and a washout follows, reowning December with relatively cheap call options keeps a weather rally available.
“This business has a tendency of, you know, acting like vultures, and if they smell blood or sense there's some blood, they tend to kind of go after it.”
— Duane Lowry
Key Takeaways
July corn had been sideways for nearly two months between a $3.09 contract low and about $3.31, and had faded off the top end.
Rolling July to December costs about 14 cents of spread, was 19 cents a few weeks earlier, and can easily widen back to 18 or 20.
The spread seasonally weakens from about June 15 forward unless a weather storyline develops, so early rollers fare better than late ones.
What may be a record volume of unpriced basis contracts is public knowledge, and the trade goes after that kind of vulnerability.
The May contract traded to $3.00 before expiring, about 23 cents below where July was trading, showing how much downside exists without a weather problem.
Pricing now and reowning December with call options after a washout keeps upside available if a late June or July weather problem develops.
Full Transcript
Duane
Lowry: Welcome everybody to another episode of the Ag View Pitch. We're midweek and you've got Chris Barron and Duane Lowry having a midweek conversation. Are we, Duane? Yes, Chris.
Chris: I thought it'd be worthwhile to have a discussion about July basis contracts and what the choices might be and what the outlook might be, as I think there's a lot of people facing these decisions.
Duane
Lowry: Sounds good. I was outside dressing and you sent me a text and said we need to talk, so, so let's, let's have at it here. Okay, the, uh, let's start with corn.
Chris: Um, it's now the 3rd of June, and, uh, when corn sales were made over the last 60 days, a lot of people opted to do just basis and to wait on futures, hoping for some sort of price recovery. And a lot of the sales made in the last 30 to 60 days were made just on basis contract.
Duane
Lowry: And for the most part, the corn market has been sideways for almost 2 months, and certainly going back to mid-May.
Chris: And if you look at it from a standpoint of what we've—
Duane
Lowry: where we've been, we've—
Chris: the contract low has been $3.09, and the topside is basically been $3.31, and we got close to that level last Thursday. In fact, last Thursday was the highest settlement we had during the last several weeks, but since Thursday the market's not performed well, and each day we get closer to our deadline on, on the decision to price or to roll.
Duane
Lowry: And if you go to roll, the problem is you're replacing ownership at one price and move into— if you say you went to the DEC, the spread's about 14 cents, and a few weeks ago that spread got out to 19, and the wider that spread is, the more adverse it impacts your rolling procedure.
Chris: And there's a seasonal tendency from about the—
Duane
Lowry: for the 15th of June forward for that spread to weaken, and the exception to that would be if you were involved in a weather market and you had a weather storyline.
Chris: And I think everybody would like to see a weather storyline, but then nobody wants to see their county as part of the story.
Duane
Lowry: And what we've got, got right now is we've got some areas that have faced some adversities and problems, but we don't have a large enough region or enough acres involved to have any sort of a national weather storyline at the present time. We have some— had some temperatures, warm temperatures in the forecast, which certainly are good for crop development.
Chris: We've had some recent rains, which have been beneficial.
Duane
Lowry: Longer-term forecasts, which did have an absence of rain for a fair amount of time, has, uh, turned wetter in the last few days, and it's a struggle to look into the near-term future and picture a weather problem. We may end up having one, but we might not have one here to talk about in the month of June, and this is the timeframe that everybody's got their backs against the wall. So I think that, um, if you're going to roll, be mindful of the fact that these corn spreads at 14 cents can get worse.
Chris: They can spend— they can easily go back to 18 or 20.
Duane
Lowry: That's probably towards the bottom side of historically where they're at, but there is that risk. So if you plan to roll, there's some justification in consider— considering to be one of the early ones to roll as opposed to one of the late ones to roll. If your decision is that you're going to price it and be done with it, obviously that's anybody's guess.
Chris: We're not necessarily here to make recommendations, but we are here to make you aware of different historical factors and other possibilities, and just to offer some perspective.
Duane
Lowry: And current prices is at— in the upper end of where we spent the last several weeks, even though they're not good prices. We know they could get worse. It's also worth noting that the May contract did go down to—
Chris: $3 level at one point in time before it expired.
Duane
Lowry: And, uh, if we don't have a weather problem, it's not unreasonable to be, uh, respectful of that possibility in the July as well, which is about 23 cents from where it's trading at right now.
Chris: So there is downside risk here, and I'm also concerned by the fact that it seems like, A lot of bushels, maybe a record amount of bushels, are sitting on these basis contracts for this time of year, and it's becoming a storyline that's fairly wide known, and it's being talked about.
Duane
Lowry: And this business has a tendency of, you know, acting like vultures, and if they smell blood or sense there's some blood, they tend to kind of go after it. So I think the farm community has some vulnerability here. And I think that considering the price action the last few days has been very poor despite having some beans export sales announcement, despite having some strength in beans, and I'm taking that as a bit of a warning sign to corn.
Chris: We also got wheat dragging the market down. It's kind of been the weakest market we've had this week.
Duane
Lowry: We got harvest just ahead of us.
Chris: Expectations are that the harvest is going to be pretty good.
Duane
Lowry: For the hard red winter wheat crop in the southwestern part of the US. There's just a lot of factors here to weigh on price, and the bottom line is until or unless we have a weather storyline, it feels like the walls are kind of closing in here on this old crop pricing. What's your thoughts here, Chris? Well, I guess the question that comes to my mind is if If one goes ahead and prices that, is there an option or a tool that one might consider to leave the top side open or reopen it if we would see the price decline some, or do we just stick a fork in it in a lot of cases and call it done? Some people are opting to call it done and take a look at their previous sales and average it together along with the added government support payments that have come along for the '19 crop. So some are opting to do that.
Others are opting to look for an opportunity to do what you described, which would basically be price it now, and then if there is a sell-off due to the lack of weather here over the next couple of weeks, and we did get a washout associated with this type of attitude that I'm discussing now, then I think there's probably an opportunity to reown in the DEC contract, and then futures or options depending on how you're looking at things. But some of the call options are probably going to be respectively cheap and still put you in a position that if there is a weather problem that develops, late June into July, which is certainly a possibility. We've certainly got historical examples of that happening.
Chris: Then, you know, there's an opportunity to consider that again.
Duane
Lowry: The only area that is really probably going to be experiencing dryness after near-term rains go through is probably going to be the southwestern, you know, 15 to 25% of the U.S. corn crop.
Chris: Whether that expands later, it's—
Duane
Lowry: who knows, but it's a possibility. And I think the call option approach would be a reasonable approach after we get a break. And I think you might find some price levels there that seem attractive for the remaining part of the growing season. So I could embrace that idea. OK. One other quick question before we wrap stuff up on this short conversation. China, you said offline here before we started the recording here, 3 cargoes to China today. Is there anything going on there with just exports or any news there? I don't know. We've had lots of different things to digest there going back to late last week with tensions between U.S. and China.
Over the last year, there's been a consistent process of having these tensions and flare-ups and certain topics come to light in the headlines, but they haven't really impacted the trade negotiation process and they hadn't derailed final signing of an agreement. And I think that in the end, it's probably not going to derail anything here either. On the other hand, it's clear that they've been actively and aggressively buying South American soybeans over the last few months and even very recently, and it's been month after month of record exports out of South America headed to China, and that's very disappointing, and it's recently even more disappointing because US soybeans has been seen as competitively priced or cheaper than South American sourced supplies, and yet they've still chosen to take— taken South American supplies. So I don't know what is ahead of us there.
I'm hopeful that they're going to be large buyers, but that still doesn't have to mean that it's going to happen right now. And with a lot of shipments coming out of South America, maybe there'll be a little bit of a lull here where we don't get the business as fast as we want, and maybe we'll see some weakness here in beans as well if we don't have a weather problem. I, I just don't know how to factor in China.
Chris: There's so many different storylines and the political nuances of it, but it's clearly been frustrating that they haven't been more aggressive, that's for sure.
Duane
Lowry: Gotcha. Um, well, I guess the takeaway then is pay attention to these July basis contracts. Sounds like there's some risk in the air. Any final comments, and we'll kind of wrap this one up?
Chris: I guess the final comment would be to address the, the situation somewhat soberly.
Duane
Lowry: Be realistic with price expectation potential here over the next few weeks, which is what you're dealing with on those decisions, and I would have a tendency to maybe encourage people to deal with this decision early on as opposed to waiting to be the last one to deal with it at the end of the month. Sounds like stuff we need to be paying attention to. Appreciate the conversation, Duane, and we'll definitely— actually appreciate you reaching out and saying, hey, let's get a quick podcast out here. Again, just trying to bring some good perspective and appreciate that. And if there's more news or more things we need to be getting out to people, let us know, Dwayne. Appreciate it. All right, will do, Chris. Thanks. Yeah, yeah, thank you. And thanks everybody for listening to a midweek update on, on the July basis contracts.
And thanks for listening to Ag View Pitch, and we will catch you next time.
Narrator: Thanks for joining us on today's episode of the Ag View Pitch. As always, you can reach out to us at cbarron@agviewsolutions.com or duanel@netins.net. We'll catch you next time on the EggView Pitch.