 "Soybean basis levels became historically weak in many areas
this summer and remain very weak in most areas," said Darrel
Good. "The prospects for a much smaller U.S. soybean harvest in
2007, and the subsequent decline in stocks, suggests that 2007
crop basis levels will eventually return to more normal levels,
but will be influenced by the nature of speculative activity in
that market and by the prospective size of the 2008 South
American crop."As soybean futures soared above $8, then above
$9 this summer, basis weakened to unprecedented levels in many
areas, Good noted. Near maturity of the July 2007 futures
contract, cash prices in Illinois were 60 cents to 90 cents
under the price of that contract. The basis was 30 cents to 40
cents weaker than the extremely weak basis of the previous year.
"Even cash prices at the Gulf dropped below futures prices,"
said Good. "Those cash bids were quoted at 18 cents over August
2007 futures on July 10, and 12 cents under August futures on
July 24 -- 60 cents weaker than on the same date in 2006.
"Cash prices remained well under the futures price at
delivery markets during the maturity of the July 2007 futures
contracts. This failure of cash and futures prices to converge
at maturity of the futures contract is similar to the problems
experienced with the soft red winter wheat futures contract at
Chicago for the past year or more."
Cash bids for harvest delivery of the 2007 crop are also
extremely weak. For various regions of Illinois, for example,
the new-crop bids on July 19 were 70 cents to $1.25 under
November futures. Some, but not all areas, saw some modest
strengthening of the basis by July 26. Still, the harvest basis
is 30 cents to 40 cents weaker than on the same date last year
and 40 cents to 50 cents weaker than during September 2005, when
Hurricane Katrina interrupted soybean shipping.
"A number of reasons have been cited for the extremely weak
old-crop basis this summer," said Good. "These include
historically large stocks of soybeans, which depressed cash
prices, and the increased speculative interest in owning futures
contracts. June 1 inventories of soybeans in the United States
were estimated at 1.09 billion bushels, 100 million larger than
the inventory of the previous year and nearly 400 million larger
than the inventory of June 1, 2005. The presence of those large
stocks allows end users to be less aggressive in bidding to
acquire their needs.
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"Speculative interest in owning soybeans was driven largely by the
11.4-million-acre decline in U.S. soybean plantings, modest concerns
about U.S. weather conditions and concerns that South American
producers would not make a large increase in soybean plantings for
harvest in 2008. Basis remained weak, however, even as futures
prices declined sharply beginning on July 16."
Were producers harmed by the extremely weak basis? Good asked.
"For those holding unpriced 2006 crop soybeans or for those
making new-crop sales, the answer depends in part on whether the
cash or futures market reflected the real value of those crops," he
said. "If the cash market reflected value, it might be argued that
those selling old-crop inventories or a portion of the new crop were
not harmed by the weak basis.
"While the recent decline in prices -- both cash and futures --
has resulted in lower returns for holders of inventory, that is a
separate issue from the weak basis. If futures markets reflected
true value, then holders of unpriced old-crop inventory were
negatively impacted by the weak basis. Those clearly negatively
impacted by the weak basis are those who were holding hedged
inventories -- short futures or hedged-to-arrive contracts."
Buying futures and selling cash soybeans -- lifting the hedge --
at the weaker-than-expected basis results in a lower-than-expected
net price. Conversely, long hedgers benefited from lifting hedges
during a period of extremely weak basis. If the new-crop basis
remains weaker than normal through the fall months, there may be
some implications for payouts on crop revenue insurance products,
depending on the level of prices at that time.
"Prospects for a substantial strengthening of the basis during
the upcoming marketing year suggests there is a potentially large
return to storage of the 2007 crop," Good noted. "On July 26, for
example, the average harvest bid in central Illinois was $1.14 under
July 2008 futures. If that basis strengthened to a more normal level
of minus 15 cents to minus 20 cents by next spring, the market is
offering storage returns of 90 cents to $1 per bushel.
"As the new crop is priced, sales should likely be made for
delivery well after harvest, particularly where on-farm storage is
available. Unless deferred delivery basis bids are aggressive, those
sales may have to be made with futures."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences]
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