The average basis level for corn has held mostly steady in the past week, while the basis for soybeans drifted 4 cents lower due to seasonal harvest pressure. Basis levels in the various wheat classes were steady to 3 cents higher.

Soybean basis is doing what it is supposed to do during harvest, as combines are rolling in the MidSouth and southern Midwest. I wrote about soybean basis last week. But corn basis remains flat with harvest yet to gear up in the Midwest. I will take an in-depth look at corn basis once Midwest harvest is well under way.

That leaves wheat. Basis levels in those markets are steady to higher, which is somewhat expected during the row-crop harvest. The wheat class that gained the most in the past week, basis-wise, was spring wheat and that is the class I will look at today.

Spring wheat has been an interesting crop this year. To start, there was flooding, and wet conditions hobbled every attempt to plant the crop. In the end, many acres did not get planted. Obviously, fewer acres planted means fewer acres harvested. So what we have is a late-planted, short crop. The new crop somehow got through the growing season even though it was 10 days to two weeks behind normal. As harvest arrived, yields were lower but proteins were higher than normal. Many farmers applied extra nitrogen to the crop to coax more protein out of it, as they wanted to take advantage of strong protein premiums that soared last spring to $6 per bushel over Minneapolis futures. They got the higher proteins, but the premiums are no longer there because there is too much high-protein wheat available. Mills and elevators are now looking for lower-protein spring wheat and are willing to pay for it.

Looking at the Minneapolis spring wheat protein scale, it is clear to see that 13% protein is worth more than 15% protein, the opposite of a normal year. The scale on Sept. 20 shows a bid for 13% protein at $1.20 over the Minneapolis December futures while 15% protein is bid 95 cents over the December futures.

For mills, the problem is consistency. They want to produce a uniform product and the higher proteins apparently will alter the outcome of many of their flours. This has mills scrambling for lower proteins to blend down higher-protein spring wheat. Many mills have even reached into the HRW wheat market for those lower proteins, but that market also produced higher proteins than normal in many areas, making it a more difficult task than usual.

Foreign buyers, however, are thrilled with shipments that have higher proteins, especially if they don't have to pay premiums for them. The problem for the export market is price. U.S. offering prices are some of the highest in the world and U.S. wheat so far has been unable to compete with other world sources for some of that business.

Looking at the latest supply and demand tables from the September crop report shows a decrease in production of about 95 million bushels from a year ago, a smaller carryover and an increase in imports that leaves total supply down about 140 million bushels. This, of course, was compensated for by lowering domestic and export use by 110 million bushels, leaving a smaller but substantial carry out.

September 2011 Spring wheat Supply and Demand Table

 (million bushels)

Carry in 185

Production: 475

Imports: 35

Total Supply: 695

Domestic use: 277

Exports: 260

Total Use: 537

Carry out: 158
  

Typically, as we go through the year there will no doubt be further adjustments to the supply and demand tables. This year getting an accurate handle on production is going to be the big issue and, along with that, usage will be scrutinized for any changes.

The smaller crop this year has the futures market carrying a premium in the front month with deferred months flat with no premiums or discounts. The market is telling us that commercial interests want wheat now rather than later. There is also no incentive for storage, but that is where most of the wheat is in anticipation of higher prices later in the crop year. Interior basis levels are higher on slow country movement and steady demand from mills and elevators, which pretty much goes hand in glove with an inverted market.

Higher prices later in the crop year is the one item that the market looks to be counting on heavily. Whether that happens or not is an unknown, but looking at U.S. and world markets today it doesn't appear likely. You know, sometimes things don't turn out as you think they should and this could be one of those times. For higher prices to happen, an event would have to take place that would reduce the world's high-quality milling wheat supply or increase demand for that supply, which would allow the U.S. to step in and fill the gap.

There is an old adage: A short crop has a long tail. I interpret that to mean that a short crop never fulfills the expectations of most for strong markets and higher prices. The market adjusts to the crop that is available and finds ways to keep supply and demand in check. Typically the crop year plods along as the market continues to wait for stronger and higher markets that never come. As the crop year nears an end, stocks are larger than expected. I am not saying that this is one of those years. But I am saying keep a close watch on the market and take advantage of any opportunities.

Bob Bailey can be contacted at bob.bailey@telventdtn.com

(CZSK)

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