There have been some interesting developments in the cash markets for both corn and soybeans recently that have had many analysts and traders scratching their heads. While strength in spreads is not unheard of as harvest wraps up and supplies get tucked away, the strength we have seen, especially in soybeans, where there is talk of tepid demand and burdensome supplies feels out of place.
As I have discussed many times before in this space, cash is king. Moves in the cash market give us greater insight into whether it is getting easier or more difficult for the world’s end users to source supplies. While we can look to the USDA and other government entities around the world to give us an outline of what they anticipate for supply and demand each year, it’s the moves in the cash market that tell us the true story of what is happening at ground level.
As I outlined in this article back in April, changes in the cash market that encourage or discourage grain movement are the best thing to watch when trying to determine which direction price *should* head. Looking at the overall trend in direction for basis and spreads has traditionally been the best way to gauge movement into the pipeline and whether it is adequate enough to meet demand.
In a year like this one, with beginning stocks up 400 million bushels in corn and 78 million bushels in soybeans and a near record fast harvest pace, one would expect we would be dealing with an absolute disaster in cash—especially when you factor in the logistical headaches we’ve seen, from a backlog at the Mexico border to the low river levels of the Mississippi and the Canadian strikes in between.
On paper, basis should be tanking, and spreads should be feeling incredibly soft, as both work to do all that they can to keep cash supplies out of the pipeline. In reality, we are seeing a move in the Nov/Jan bean spread that is basically unprecedented for this type of stocks to use ratio, with it erasing over a dime worth of carry over the last two weeks. The move in corn spreads has not been quite as stout, though to see it come in as it has with record yields coming out of the fields at a brisk pace and a large amount of leftovers from last year is interesting.
What Are Spreads Saying?
Pinning down what spreads are telling us is far easier than determining the why behind the move. One of the first things merchandisers are taught to watch when learning to manage a position is the action in spreads and how those moves can impact their bottom line. Buying grain for an elevator isn’t just a simple one step process, as there is risk in the ownership of physical supplies as well as a substantial financial outlay that needs to be covered. Spreads are one piece of the formula that provides the economic incentive to keep supplies out of the pipeline.
The wider a spread gets, the more economic incentive there is to hold onto supplies. While the narrowing of a spread is simply the opposite, in that supplies are not moving well enough to satisfy demand.
The why behind what is happening in spreads is not quite as simple to pin down but looking back over the years where we have seen similar moves, it could likely be attributed to a handful of different factors. One of those factors being that demand is outpacing expectations and coming in much hotter than traders had anticipated. Another factor could be that supply is lower than expected. While the third factor is the one that seems to be getting the greatest play from market analysts and advisors, and that is that the farmer is hoarding supplies and causing a false signal in the market.
I would venture it is likely a combination of all three, with how long this current run lasts a better indication of how it’s split.
Could Demand Be Underestimated?
While my mental jury is still out on what is happening in cash and what it means for the market as we move ahead, I think it is pretty easy to see that demand is likely going to outpace expectations, especially in corn, where the early season export program is running 20% ahead of a year ago levels.
I also must start to question the pace of Chinese buying and the influence China’s presence in the US export system has on the overall cash market. It was just this summer COFCO announced it would take over the Cahokia, Illinois facility on the Mississippi River. While this completed a process that began in 2017, it still makes one wonder how the export sales reporting goes for a US entity with direct access to the market in China, as well as the assets and the market intel that comes with it.
I have had conversations with folks at the USDA about the potential for an export sales reporting loophole, with many agreeing it is very likely that one exists. However, it seems that identifying it and subsequently closing it would prove difficult.
Knowing a blind spot in Chinese buying is a possibility that makes moves in the cash market that much more important to pay attention to, with continued strength in the spreads into the end of the month likely pointing to far greater underlying demand than anticipated.
Could Supply Be Overstated?
Looking at the way this crop finished, it is very possible we could see a reduction in overall production moving forward. Many farmers have reported beans coming out of the fields well below the 13% moisture that is considered dry and ready for delivery. While it is difficult to pin down the extent of losses, simple math would say beans coming in 3% lower than where they should have been for moisture is a loss of 1.5 bushels an acre on 50 bushel per acre beans. This without mentioning the ease at which incredibly dry beans split when handled, leading to increased shrink.
Based on yield reports, it is very likely we are still looking at record crops, but the market action so far would say the likelihood crop sizes grow significantly when we get final numbers in January is relatively low.
Are Farmers Hoarding Supplies?
I’m still not sure how I feel about this thought process either. I mean, of course farmers are holding onto as much as they can, so are commercials, the market was paying a fancy price to do so in many parts of the country. But can the farmer inherently change how the cash market trades because of their ability to keep grain out of the pipeline? I’m not yet convinced.
However, without a major rally in flat price—something many believe will be hard to accomplish—it will be difficult to determine just how much grain is parked in bins across the countryside waiting to be sold.
Is Freight Playing a Role?
Of course it is, freight costs are higher, tows are reduced and less grain is able to move through the pipeline, leading to a higher basis at the Gulf. However, to see the Gulf doing its best to offset increased freight costs, not leaving it to the interior to manage, points to solid demand for the bushels we have to ship.
As I said back in April, “If freight costs rise but basis paid to the seller remains strong, the end user is willing to eat increased costs to cover their needs, a sign of strong demand.”
In The End
When all is said and done, we should no longer be hearing about poor or limited demand, as the cash market is telling us demand is solid. Moves this week will likely have a lot to say about what happens next. Further strength will need to be respected, while a collapse would say the supply is there, but just needed some encouragement to get moving.
With the US the lowest cost, most reliable supplier with the highest quality though, do not be surprised if demand continues to show signs of strength.
As always, don’t hesitate to reach out with any questions! Have a great day.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
