Kub's Den
Elaine Kub Contributing Analyst
Mon Dec 15, 2014 09:30 AM CST
(Page 1 of 5)

Seeing -20 wind chills in November isn't entirely unusual in the Northern Plains -- and seeing -$1.00 basis bids definitely isn't. Farmers in North and South Dakota may have tried to forget about those triple-digit threats to revenue during the past couple of years of national grain scarcity, but their familiarity came flooding back recently while elevators have tried to ship out massive stockpiles via bottlenecked rail lines. Throughout the past nine months, the average cash bid for corn in North Dakota has been more than 90 cents under the nearby futures price. At the cash market's nadir in April, the average North Dakota soybean basis was $1.50 under, shaving about 10% off the overall price tag.

Side-by-side maps compare a year with normal basis patterns to the pressure felt on the Northern Plains during spring 2014. That pressure persisted into early May as the region dealt with rail delays and increased shipping costs. (DTN map by Kathryn Myers and Elaine Kub)

It's been frustrating for a number of reasons.

1) While the entire grain industry watched corn futures fall to $3.18 at the start of October, for instance, North Dakota farmers were seeing a wildly unprofitable cash price of $2.18.

2) Because this region is full of captive rail shippers with no nearby barge market, processing plant, or feedlot to add competitive bids to the mix, there was basically nothing they could do to influence or counteract the delays and punitive shipping costs on the rail lines.

3) It is very difficult to prove how much blame lies anywhere because it's nearly impossible to calculate what basis "should" have been in a world unaffected by rail delays and high shipping costs.

Basis -- the difference between the price of a physical commodity at a specific location and the price of a futures contract for that commodity -- is determined by a region's own unique blend of supply and demand. There is always the opportunity to arbitrage physical grain against the expiring futures contracts, so basis has always theoretically included the transportation costs to get grain to an exchange's delivery warehouse. Thus, basis has historically tended to be relatively weak out on the fringes of the Corn Belt, where the transportation costs to demand sinks (ports, regions with heavy livestock concentration, etc.) are the highest.

This demand picture has fluctuated in the past decade, especially for corn, as ethanol plants have popped up all across the northwestern Corn Belt, but it wasn't until the railroads got slowed down and plugged up last spring that it became clear just how dependent on rail the Northern Plains still really are.

During a typical March, for instance, one might reasonably expect to see spring wheat basis in the Dakotas be near zero. In March of 2014, the average wheat bid recorded by DTN from 140 elevators in North Dakota was 59 cents under the futures price. In April, corn basis is typically around -60 in this region. In April of 2014, the average corn bid in North Dakota was -117. In a normal May, North Dakota soybean basis could reasonably be -95. In May of 2014, it was -134.

Those were the months when the pain was the greatest, but I've waited until now to crunch the numbers because no one was sure how well or poorly the huge 2014 harvest would be handled by the railroads and the elevators that ship grain on the railroads. Now, with the entire 2013-14 marketing year behind us and a good start on the newly-harvested 2014-15 marketing year, we can start to tally up just how much money this quagmire has sucked out of farmers' pockets.

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