"High prices for these crops entice producers to do some forward
pricing, while the weak basis and margin risk of hedging
discourage forward pricing," said Darrel Good.
Good noted that
some grain buyers have taken steps to limit futures margin
exposure by limiting new hedged-to-arrive contracts for
producers to the current marketing year and by not offering flat
price bids beyond the 2008-09 marketing year. Reduced
availability of hedged-to-arrive and flat price contracts
transfers some of the margin risk of forward pricing to the
The sharp run-up in cash and futures prices of soybeans since
the harvest of the 2007 crop has at least partially diverted
attention from an underlying issue of extremely weak basis, Good
observed. While basis levels have strengthened marginally, since
harvest they remain very weak by historical standards.
The average cash price of soybeans in central Illinois was 85
cents to 90 cents under March 2008 futures at harvest time in
2007. On Jan. 17, the average price was still 72 cents under
March futures. In northern Illinois, the March basis only
strengthened from about minus $1.05 at harvest time to minus 86
cents on Jan. 17. In southern Illinois, the average March basis
strengthened from about minus $1 at harvest to minus 61 cents on
"The continuation of a weak basis means that short hedges
have not earned a return to storage since harvest, particularly
in northern and central Illinois," said Good. "The strengthening
of the basis has not covered the cost of owning and storing the
"Conversely, long hedgers have been favorably impacted by the
weak basis that has resulted in lower-than-expected buying
prices for cash soybeans. Those who only buy or sell in the spot
cash market have probably not been impacted by the weak basis.
In theory, the cash price reflects fair market value for the
commodity, so traders in the cash market are receiving or paying
what soybeans are worth."
The weak interior basis has been attributed to a combination
of factors. These include higher transportation costs, higher
storage and ownership costs associated with interest cost on
high-priced soybeans, and a shortage of storage capacity at
"Only about 65 million bushels of storage capacity were added
in Illinois in 2007, while combined supplies -- production plus
Sept. 1 stocks -- of corn and soybeans in Illinois were up about
250 million bushels in 2007," Good said. "A shortage of storage
capacity, however, is not an issue at this time of year."
The issue of weak soybean basis appears to be broader than
just increased transportation and storage costs and an increase
in demand for storage space, he added.
[to top of second column]
"The broader problem is revealed by the lack of convergence of cash
and futures prices of soybeans at the futures delivery markets as
futures contracts mature," said Good. "Theory suggests that the
opportunity to deliver and take delivery of soybeans -- warehouse
receipts or shipping certificates -- at contract maturity should
ensure that cash and futures prices come together at maturity of the
"Historically, soybean contracts have generally performed well
relative to that performance criterion. However, lack of convergence
has been an issue since early 2006, continuing through the maturity
of the January 2008 contract."
Basis levels at delivery markets were especially weak at maturity
of the July and September 2007 contracts. At maturity of the January
2008 contract, basis at the Illinois River was still about minus 55
"The lack of convergence in cash and futures prices at soybean
delivery markets implies that delivery mechanism is failing to some
extent," said Good. "Persistence of futures prices above cash value
at maturity may indicate that the extremely large speculative
activity in the futures markets is holding futures prices
artificially high and that the delivery mechanism is not robust
enough to force convergence of cash and futures prices.
"If this is the case, weak interior basis and issues with
convergence may persist for the foreseeable future."
Cash bids for harvest delivery of the 2008 soybean crop, for
example, reveal a continuation of weak soybean basis. On Jan. 18,
average cash bids for harvest delivery ranged from about 70 cents
under November 2008 futures in central and southern Illinois to 84
cents under in northern Illinois.
"Bids are 30 cents to 40 cents weaker than experienced at this
time of year over the previous four years," he said. "Part of the
weakness in new crop basis reflects the industry's response to
increased basis risk that unfolded over the past year. Some of the
weakness may also reflect the extreme margin risk associated with
"Aggressive new crop selling by producers has apparently created
large short futures positions for some buyers, resulting in large
futures margin requirements, as November 2008 futures have increased
nearly $4 per bushel since the fall of 2007. Large margin
requirements increase the interest cost of hedging, and weak basis
bids may help offset some of that increased cost."
[Text from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental