The most delayed U.S. corn harvest on record is resulting in chaos for traditional commodity trade routes.
Corn usually is harvested in the midwest, before it is sent south to be exported, according to Bloomberg. But because farmers in the east, hurt by a spring-time deluge, are holding back on supplies in hope of higher prices, the commodity’s price has been pushed higher than the futures market in east – while it remains lower than the futures market in the west. It’s a phenomenon known as “basis arbitrage”.
The result? Corn is now starting to be shipped “over Chicago”: from the west, to supply corn processors, ethanol plants or animal-feed makers in the east.
Dan Basse, president of consulting firm AgResource said: “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. If basis is strong enough, we will get that pull into Ohio.”
The spread on the arbitrage isn’t yet large enough to move large amounts of grain, but “it doesn’t take much” for that to change, according to Pat Bowe, chief executive officer at U.S. crop handler Andersons Inc.
Bowe said: “There’s still a lot of corn out there, that’s a thing that’s amazing and people forget. 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.”
A $28 billion government bailout has helped growers with their falling income due to the ongoing trade war, but getting farmers to sell crops remains difficult. Corn prices have been under pressure after crops survived a record spring rain better than expected. Large corn bases for the season have also hurt export earnings, as “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 Archer-Daniels-Midland Co. expects farmer selling to ramp up next year as growers make space for their next crop, according to Chief Financial Officer Ray Young. Pacific Ethanol Inc. CEO Neil Koehler echoed those sentiments.
Young concluded: “At some juncture, corn will get commercialized. There will be a break in the basis here and that will benefit the originators like us.”