A number of questions have been asked in regard to the extremely weak soybean basis. The table below includes an example of current soybean basis for a Mississippi river terminal elevator. Soybean basis levels at harvest have not been this depressed since 2008.
An unusually weak or negative basis at harvest can be the result of large production and the demands it places on storage and transportation. In August, USDA forecast a record large U.S. soybean crop of 4.586 billion bushels. Pre-report expectations indicate production estimates may increase further in the upcoming September 12 USDA supply-demand report, keeping basis levels subdued through the peak harvest months.
|Delivery Period||Basis||Futures Month||Futures Price|
In the table above notice how the basis is projected to strengthen in the months ahead. Not only does the basis improve considerably after harvest, but there is a positive spread or “carry” between the nearby (November) futures and distant (January) futures. These are two indications that growers should consider storage of the 2018 crop.
For storage to be beneficial however, strengthening in the basis and the futures carry that is being offered, has to be more than enough to cover the costs associated with storage. The return produced by storing the commodity can be expressed as follows:
Return to Storage = Futures Carry + Change in Basis – Cost of Storage
Although storage has a cost and carries with it exposure to unfavorable price movements, some of this risk can be managed by hedging with futures to lock in price levels. If the carry being offered is equal to or greater than the cost of the storage, this can be locked-in with a short (selling) hedge, allowing any strengthening in basis after harvest to be added to the net price.
For example, futures price risk can be managed by selling a January futures contract to lock in the current carry being offered, which leaves only basis risk.
The carry in the futures market and outlook for improvement in the basis are sending a signal to store and deliver post-harvest. To better evaluate if this strategy works for you, calculate your own expected cost of storage.
In some years bushels stored commercially do not provide a positive return above the cost of storage. On-farm storage can offer a better chance of a positive return, in addition to the flexibility of deciding when and where your soybeans are delivered.