High prices for grain on the boards of trade don't necessarily show up at local elevators. Farmers harvesting record yields this fall are finding cash prices well below futures prices, said Melvin Brees, University of Missouri economist.
“The price difference is not a grain market collusion; it is simply supply and demand,” said Brees, grain marketing specialist at the MU Food and Agricultural Policy Research Institute (FAPRI).
The futures price on the Chicago Board of Trade is an offer for grain at some future time and at a specified delivery point. The local cash price is an elevator's signal for how much grain they want, or don't want, today, Brees said.
Farmers are seeing a dollar, or more, price differential, or basis, for a bushel of soybeans, Brees said. Market basis is the difference between the price on the board of trade and the price at the local elevator.
“With record harvests coming in, local elevators can't handle much more grain,” Brees said. “If an elevator buys more grain than it can store, it must start piling that grain on the ground, which increases its risk.”
One traditional measure of basis is how much it costs to move grain from a local elevator to market in Chicago.
“Today, there are higher freight costs to move grain,” Brees said. “Fuel costs are higher, which makes trucking less attractive.” At many locations, there is greater competition for rail cars to move dry commodities, and there is greater competition for barges to move grain on the rivers.
“All of those things push cash bids down,” Brees said. “Even with the dollar drop in basis, most commodity prices are at historically high levels.”
In the last 20 years, corn has been higher in only 10 percent of the months. Soybeans have been higher in only 4 percent of the months. Wheat is at record prices and has never been higher.
On Sept. 11, basis differentials from Glasgow in central Missouri to the Chicago Board of Trade (CBOT) were: corn cash bid, $2.99 per bushel and CBOT Dec. '07 contract $3.41 for a minus basis of 42 cents; soybeans, cash $8.21, CBOT, Nov. '07, $9.05 for minus basis of 42 cents; wheat cash $7.61, Chicago, Dec. '07, $8.90, basis minus $1.29.
While local elevators face grain gluts at harvest, traders in futures contracts in Chicago or Kansas City look at a bigger picture of worldwide trade.
“Wheat is a food crop in short supply around the world,” Brees said. “Drought in Australia greatly reduced its exports. We will be exporting as much as we can.”
By world standards, the United States is not a major player in the wheat trade. “About everyone in the world can grow wheat,” Brees said. “Somewhere, someone will be harvesting wheat 10 or 11 months of the year.”
When it comes to corn, the U.S. Corn Belt dominates the world market. However, corn faces increased demand from ethanol producers and from livestock feeders at home.
“As soon as elevators get the harvest glut into storage, ethanol plants and livestock feeders will have to bid to get it out,” Brees said. If wheat supplies stay short and prices continue up, no wheat will be fed to livestock, causing added corn feed use. That will pull corn prices upward as well.
U.S. farmers are major players but not dominant in soybean production. South America is a large competitor and soybean prices depend on how Brazilian growers respond to these prices.
“Futures traders see growing demand and possible short supplies in years ahead,” Brees said. “Three crops — corn, soybeans and wheat — will be competing for acres.”
Futures prices will help farmers decide which crop to plant next season.
“As we go into the winter and spring, markets will still be bidding for acres,” Brees said. “I mean, these are good prices. When soybeans are over $9 per bushel, you don't usually get those prices at harvest time.”
Each producer will have to look at the futures price, than calculate a budget for their own farm, based on their own costs, Brees said. “For now, pay attention to what the market will give for that crop.”
Producers can check both daily cash bids for their area and all futures contracts on the boards of trade on the MU Extension Commercial Agriculture's Agricultural Electronic Bulletin Board (AgEBB). Go to http://agebb.missouri.edu/mkt/index.htm. Then, click on “Missouri cash grain bids” for cash bids and “commodity quote settlements” for futures prices.