Producers Should Examine Futures Market Price Risk And Basis Risk Separately

DR. AARON SMITH

KNOXVILLE, TENNESSEE

Since August 3, December corn futures have traded between $4.67 and $5.08, a 41-cent range. For 2023, the December contract has a price range of $4.67 to $6.29, a 162-cent range. Average corn basis, since Au-
gust 3, at Tennessee elevators and barge points ranged between 105 under to 75 over, a 180-cent range. This basis range encompasses average daily corn basis values at elevators and barge points in Tennessee for all 2023. Typically, more price risk is embedded in the futures market than basis, however the past two years have seen dramatic changes in corn basis during harvest. Harvest typically has the weakest basis offerings (five-year average in Tennessee for the month of October is 27 under) of any time of the year, due to the abundance of available new crops and a limited amount of storage. The very weak harvest basis, the past two years, has largely been driven by low water levels on the Mississippi River restricting barge traffic and increasing the cost to move corn and soybeans to export terminals in Louisiana. 

Moving forward, producers may want to secure basis (through a basis contract or other marketing tool) on more of their production in spring or summer to protect against the potential for dramatic basis declines during harvest. Ten-year average (2013 -2022) corn basis at Tennessee elevators and barge points for September, October, and November were 15 under, 21 under, and 7 over the December contract. These basis levels are lower than basis offerings at other times during the year but securing a basis contract at 15 to 20 under for harvest delivery can take a substantial amount of downside risk off the table before harvest. Over the course of a production year, when examining price risk management producers should examine futures market price risk and basis risk separately. This will allow producers to pick times when futures prices are advantageous, or basis is advantageous. Using price risk management tools in conjunction with on-farm storage can also be beneficial to protect against futures and basis price risk while not substantially increasing production risk. 

 The Crop Progress report estimated soybean condition at 52% good-to-excellent and 17% poor-to-very poor; soybeans drop- ping leaves at 86% compared to 73% last week, 78% last year, and a 5-year average of 77%; and soybeans harvested at 23% compared to 12% last week, 20% last year, and a 5-year average of 22%. In Tennessee, the Crop Progress report estimated soybean condition at 76% good-to-excellent and 7% poor-to-very poor; soybeans dropping leaves at 73% compared to 62% last week, 72% last year, and a 5-year average of 67%; and soybeans harvested at 29% compared to 17% last week, 20% last year, and a 5-year average of 20%. November 2023 soybean futures closed at $12.66, down 9 cents since last Friday. For the week, November 2023 soybean futures traded between $12.56 and $12.87. New crop cash soybean prices at elevators and barge points ranged from $11.42 to $12.96. Downside price protection could be achieved by purchasing a $12.70 November 2023 Put Option which would cost 24 cents and set a $12.46 futures floor. Nov/Dec 2023 soybean-to-corn price ratio was 2.57 at the end of the week. Nov/Jan and Nov/Mar future spreads were 18 and 33 cents. March soybean-to-corn price ratio was 2.56 at the end of the week. January 2024 soybean futures closed at $12.84, down 10 cents since last Friday. March 2024 soybean futures closed at $12.99, down 11 cents since last Friday. 

Corn 

Ethanol production for the week ending September 29 was 1.009 million barrels per day, unchanged from the previous week. Ethanol stocks were 21.884 million barrels, down 164,000 barrels compared to last week. Corn net sales reported by exporters for September 22-28 were net sales of 71.5 million bushels for the 2023/24 marketing year and 24.1 million bushels for the 2024/25 marketing year. Exports for the same period were down 16% compared to last week at 24.1 million bushels. Corn export sales and commitments were 28% of the USDA estimated total annual exports for the 2023/24 marketing year (September 1 to August 31) compared to the previous 5-year average of 37%. Across Tennessee, average corn basis (cash price-nearby futures price) strengthened or remained unchanged at West, Northwest, North-Central, West-Central, and Mississippi River elevators and barge points. Overall, basis for the week ranged from 104 to 20 under, with an average of 50 under the December futures at elevators and barge points. 

The Crop Progress report estimated corn condition at 53% good-to-excellent and 18% poor-to-very poor; corn mature at 82% compared to 70% last week, 73% last year, and a 5-year average of 75%; and corn harvested at 23% compared to 15% last week, 19% last year, and a 5-year average of 21%. In Tennessee, corn condition was estimated at 75% good-to-excellent and 7% poor-to-very poor; corn mature at 99% compared to 91% last week, 95% last year, and a 5-year average of 96%; and corn harvested at 58% compared to 46% last week, 61% last year, and a 5-year average of 62%. New crop cash prices ranged from $3.97 to $5.18 at elevators and barge points. December 2023 corn futures closed at $4.92, up 16 cents since last Friday. For the week December 2023 corn futures traded between $4.76 and $4.99. Dec/Mar and Dec/May future spreads were 15 and 23 cents. Downside price protection could be obtained by purchasing a $4.95 December 2023 Put Option costing 15 cents establishing a $4.80 futures floor. March 2024 corn futures closed at $5.07, up 16 cents since last Friday. May 2024 corn futures closed at $5.15, up 15 cents since last Friday. 

Soybeans 

Across Tennessee average soybean basis strengthened or remained unchanged at Northwest, North-Central, West-Central, West, and Mississippi River elevators and barge points. Basis ranged from 122 to 45 under the November futures contract, with an average basis at the end of the week of 64 under. Soybean net weekly sales reported by exporters were net sales of 29.7 million bushels for the 2023/24 marketing year. Exports for the same period were up 24% compared to last week at 24.7 million bushels. Soybean export sales and commitments were 38% of the USDA estimated total annual exports for the 2023/24 marketing year (September 1 to August 31), compared to the previous 5-year average of 49%. 

Cotton

North Delta upland cotton spot price quotes for October 5 were 84.29 cents/lb (41-4-34) and 86.54 cents/lb (31-3-35). Adjusted world price (AWP) was up 0.09 cents at 72.36 cents. Cotton net weekly sales reported by exporters were 240,000 bales for the 2023/24 marketing year and 2,200 for the 2024/25 marketing year. Exports for the same period were down 6% compared to last week at 149,600 bales. Upland cotton export sales were 50% of the USDA estimated total annual exports for the 2023/24 marketing year (August 1 to July 31), compared to the previous 5-year average of 62%. 

The Crop Progress report estimated cotton condition at 30% good-to-excellent and 43% poor-to-very poor; cotton bolls opening at 75% compared to 65% last week, 76% last year, and a 5-year average of 73%; and cotton harvested at 18% compared to 13% last week, 21% last year, and a 5-year average of 17%. In Tennessee, the Crop Progress report estimated cotton condition at 69% good-to-excellent and 13% poor-to-very poor; cotton bolls opening at 77% compared to 65% last week, 67% last year, and a 5-year average of 75%; and cotton harvested at 5% compared to 3% last week, 5% last year, and a 5-year average of 9%. December 2023 cotton futures closed at 87.14 cents, down 0.01 cents since last Friday. For the week, December 2023 cotton futures traded between 86.45 and 88.06 cents. Downside price protection could be obtained by purchasing an 88 cent December 2023 Put Option costing 2.99 cents establishing an 85.01 cent futures floor. March 2024 cotton futures closed at 88.19 cents, up 0.27 cents since last Friday. May 2023 cotton futures closed at 88.95 cents, up 0.45 cents since last Friday. Dec/Mar and Dec/May cotton futures spreads were 1.05 cents and 1.81 cents. 

Wheat 

Wheat net weekly sales reported by exporters were net sales of 10.0 million bushels for the 2023/24 marketing year. Exports for the same period were down 34% compared to last week at 14.3 million bushels. Wheat export sales were 50% of the USDA estimated total annual exports for the 2023/24 marketing year (June 1 to May 31), compared to the previous 5-year average of 55%. Wheat cash prices at elevators and barge points ranged from $4.75 to $5.49. December 2023 wheat futures closed at $5.68, up 27 cents since last Friday. December 2023 wheat futures traded between $5.41 and $5.80 this week. December wheat-to-corn price ratio was 1.15. Dec/Mar and Dec/Jul future spreads were 30 and 66 cents. March 2024 wheat futures closed at $5.98, up 25 cents since last Friday. 

The Crop Progress report estimated winter wheat planted at 40% compared to 26% last week, 39% last year, and a 5-year average of 43%; and winter wheat emerged at 15% compared to 7% last week, 14% last year, and a 5-year average of 16%. In Tennessee, winter wheat planted was estimated at 9% compared to 4% last week, 11% last year, and a 5-year average of 11%; and winter wheat emerged at 1% compared to 0% last week, 5% last year, and a 5-year average of 5%. July 2024 wheat futures closed at $6.34, up 22 cents since last Friday. Downside price protection could be obtained by purchasing a $6.40 July 2024 Put Option costing 60 cents establishing a $5.80 futures floor. New crop wheat cash prices at elevators and barge points ranged from $5.61 to $6.08. ∆

DR. AARON SMITH: University of Kentucky