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The most-delayed U.S. corn harvest on record has divided the Midwest market, jumbling trade routes for the grain that usually flows south.
Signs of ample global supplies have weighed on Chicago futures, spurring farmers in eastern areas to hold back supplies in the hope of better prices. They were hurt more by a spring-time deluge than growers in the west.
But their hoarding has pushed up the region’s prices in the physical market above futures, while those in the west remain below -- creating what’s known as a basis arbitrage opportunity.
This dynamic has started to draw some cargoes from the west to supply corn processors, ethanol plants or animal-feed makers starved by farmer hoarding in the east. A few shipments have already started to flow in that direction, in a trade known as moving grain “over Chicago.” Typically, corn goes from growing areas in the Midwest to the south, where it gets exported.
“Corn from the west going to east? It should happen at some point but it’s not the way the U.S. market is set up to transport,” Dan Basse, president of consulting firm AgResource, said in an interview at the Global Grain conference in Geneva this month. “If basis is strong enough, we will get that pull into Ohio.”
While the basis arbitrage isn’t yet enough to move large amounts of grain from west to east, “it doesn’t take much” for that to change, Pat Bowe, chief executive officer at U.S. crop handler Andersons Inc., said in an interview from the Baird conference in Chicago earlier this month.
“There’s still a lot of corn out there, that’s a thing that’s amazing and people forget,” Bowe said. “The problem has been that with the low flat price, the farmer has been reluctant to sell so there’s a lot of on-farm storage and farmers have corn tucked away, they just don’t want to sell at $3.50 a bushel.”
Getting farmers to sell crops has been especially difficult this year as a $28 billion government bailout has helped growers battle falling income due to President Donald Trump’s trade war with China. Corn prices have also been under pressure as U.S. crops in general withstood record spring rain better than first thought and Brazil gathered a bumper harvest.
Unusually high corn bases for this time of year have also hurt export earnings for some of the world’s largest agricultural commodity traders and ethanol makers. Outstanding sales for U.S. corn exports so far in the 2019-2020 season are trailing the year earlier pace by 32%, government data show.
But flows could still change in their favor if Archer-Daniels-Midland Co., the ‘A’ in the storied ABCD quartet of crop giants that have dominated the market for more than a century, turns out to be right.
Chicago-based ADM expects farmer selling to ramp up next year as growers make space for their next crop, Chief Financial Officer Ray Young said in an earnings call last month. Pacific Ethanol Inc. CEO Neil Koehler agrees. More plantings next year will also help alleviate the pressure, he said earlier this month.
“At some juncture, corn will get commercialized,” Young said. “There will be a break in the basis here and that will benefit the originators like us.”
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