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June 13, 2023
Corn Outlook Update Following USDA’s June WASDE Report
Purdue ag economists James Mintert and Nathanael Thompson discussed the updated corn outlook following USDA’s June World Ag Supply and Demand Estimates (WASDE) report on the latest Purdue Commercial AgCast video podcast. The latest corn crop condition ratings were discussed along with implications for 2023 U.S. corn yield, production and carryover stocks. Corn export prospects were also featured with a comparison to South American and Black Sea region exports. The discussion concluded with an overview of corn basis and basis forecasts using the recently revamped Purdue Crop Basis Tool.
Companion slides and the audio transcript can be found below.
James Mintert: Welcome to Purdue Commercial AgCast, a Purdue Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m Jim Mintert, director of the Center for Commercial Agriculture, and joining me today is Dr. Nathan Thompson, who is an associate Professor of Ag Economics. And we’re going to take a little look at the corn outlook in light of the fact that USDA released new supply demand estimates on Friday. And there wasn’t a lot of information in that, but we’re gonna take a little bit of review of some of that information and then also take a look at what’s taken place with respect to basis. And of course, Nathan spends a lot of time updating the crop basis tool here at Purdue.
[00:00:40] Review of WASDE & Corn Outlook
So, I think the big news and the corn crop really isn’t coming off of the WASDE report on Friday. It continues to be what’s going on with respect to the crop progress. As of June 6th, 45% of the U.S. corn crop was in the D1 to D4 drought category. And if you look at the crop progress report that came out Monday afternoon, just yesterday, the progress is not looking good relative to recent years. I think the good to excellent category was about 61%. That’s a three point drop compared to the prior week and you can’t make too much of these crop ratings this early in the season, but it is unusual to see that low of a percentage of the crop rated good to excellent.
And you know, as you look at the individual states, I think Indiana dropped pretty hard. I think it was down seven points compared to a week or earlier. Ohio was down seven. Illinois was down a couple, Iowa was down a couple. Wisconsin was down six. So, you know, as you move around, there really wasn’t much positive news out there.
I think one of the few pluses was Kansas at plus five. Missouri was up slightly at plus one, but they had a relatively low rating to start with and so did Illinois. Again, you can’t get too excited about those crop condition ratings this early in the growing season, but it is a little unusual. And of course people continue to be very concerned about the drought situation with respect to what that might mean.
And of course, the market is trading every new weather forecast, right?
Nathanael Thompson: I mean, yeah. what we’re paying attention to. And like you said, it’s, it’s not something that this early in the season is gonna determine exactly what yields are gonna be, but the market is paying very close attention to it.
And as time goes on right, that will start to impact yield if we don’t see kind of timely rains that we need in some of these areas that are pretty dry.
James Mintert: Yeah. And in past years, when you start worrying about the corn crop, it usually is because you had trouble getting the crop planted. That was really not the case this year.
Most people were able to get the crop planted in a reasonably timely fashion. Although, having just got back from kind of a mini crop tour in Indiana. I was a little surprised at how late some of the corn was, but that’s not necessarily representative of the broader picture. But still you can see even traveling down the highway, you can see some issues with respect to emergence, some spotty stands. Things looking maybe just a little more ragged than what you’d normally expect to see.
So on the report on Friday, USDA did not adjust their yield estimate. They’re sticking with a trend line estimate that they’ve been using, which is 181.5. When I estimate a trend using a slightly different timeframe, I actually come up with a slightly higher trend yield of 183.
And, you know, looking ahead most years, USDA sticks with that trend yield on the July report as well. So it’ll be interesting to see how weather conditions play out these next few weeks and whether or not USDA chooses in the July report to stick with that trend yield in the absence of actually some survey-based data.
But they have on occasion reduced the yield in July. So we’ll see how that shakes out. But we’re still sitting with that 181.5 and, you know, I think it’s important to remember that trend yield is just that. It’s just a mathematical trend. It’s indicative that over long periods of time, technology improves and yields tend to go up.
But on a year to year basis, we can deviate pretty significantly from that trend yield. And of course, last year was a case in point, yield was at 173.3, well below trend. 2021 yield was a little bit below trend where we were at 176.7. Both crop years ’19 and ’20, we were below trend. So we could still see a significant movement away from that trend yield. And I guess I just emphasized all the negatives with respect to trend yield. You go back to ’16, ’17, and ’18, we had yields that were above trend. And it’s still early enough that if the weather conditions improve we could still see some very good yields, and I think it’s important to remember that when you start thinking about the outlook.
Just a reminder, USDA is going to release the planted acreage estimates on June 30th. Those are estimated here as of essentially the center point for that is June 1. Their estimate back in March was 92 million acres. I really haven’t seen any information that would suggest that we’re going to deviate much from that. I don’t think we had enough crop planting difficulties to have people back away from corn. What do you think, Nathan?
Nathanael Thompson: Yeah, I haven’t seen any major discussion of that being, you know, something that we’re going to see a huge change on. But again, you know, you never know.
James Mintert: One point I guess I kind of wanted to make is it does not take a 2012 type of drought to make a difference.
So USDA is projecting 92 million acres of corn. They’re using the trend yield number of 181.5, and that gives them a production estimate for this year of 15.27 billion bushels. So that’s up from 13.73 last year. So that’s about a billion and a half bushels more than last year’s crop.
It’s above the ’21 crop, which was almost a record. That was at just over 15 billion bushels. The ’16 crop was 15.15 billion bushels. That is our record large corn crop. So if that materializes 92 million acres at 181.5 bushels to the acre, that would be record large at that 15.27 billion bushels. But we could fall below that. So keep that in mind.
And with that kind of a projection and looking at USDA’s demand estimates for the upcoming crop year, this is really the negative story. That gives them a current ending stocks number of 2.26 billion bushels. That’s up from 1.45 from the ’22 crop. And that would be one of the largest corn crop carryovers we’ve had in quite some time.
I think in 2018, we were at 2.22 billion bushels. I think in 2016. We were very close to that 2.26. So it’s been a while since we’ve seen that kind of a carryover. And the big point is the huge change relative to these last three years. The last three years, looking at the 2020 corn crop, the 2021 crop and the 2022 crop, we had carryovers of less than 1.5 billion bushels. In the 2020 crop year we were down to 1.23. ’21 crop year we were are at 1.38. The ’22 crop, as I mentioned earlier, we are at 1.45. At least that’s USDA’s current projection. So it’s a big swing in the carryover. And of course that explains the negativity we’re seeing with respect to prices, right?
Nathanael Thompson: Yeah, that’s exactly right. It’s weighing on markets. But again, that’s a pretty early projection and so time will tell, you know, what those numbers are actually gonna look like.
James Mintert: So if you look at it in terms of ending stocks as a percentage of usage. That would push that ending stocks estimate for the ’23 crop all the way up to 16%. And again, put that in perspective.
In 2020, we were at just a little over 8% of ending stocks is a percentage of usage. In ’21, it was just a little over 9%. USDA’s current estimate for the ’22 crop leaves us a little below 11%. I think 10.6 is the way that works out, 10.6%. So 16% is a big move, as we just indicated and takes us back to the levels we haven’t seen since the 2018 crop. We had about a 16% carryover coming out of that one. We had about a 16% carryover coming out of the 2016 crop. 2017 was 14. 2019 was 14. It’s a big switch with respect to the increase in the carryover stocks. And again, that that’s indicative of why we’ve seen so much negativity in corn prices here over the last several months.
[00:08:05] Corn Exports
James Mintert: So I thought it’d be interesting in light of the fact that USDA didn’t really make any changes on the balance sheet with respect to the domestic situation, to look a little bit more deeply at what’s taken place with respect to corn exports. And I think, you know, it’s been kind of a bit of a surprise if you look at the U.S. versus the major competitors. And just as a reminder, those major corn export competitors are Argentina, Brazil, South Africa, Ukraine, and Russia. You can see how we’ve lost ground relative to those competitors. If you look at those competitors here in ’23, USDA’s projecting that those on a combined basis would be able to export about 4.8 billion bushels.
That’s more than four times what USDA is projecting for the U.S. Projecting U.S. exports at about 2.1 billion bushels. And you know, Nathan, you’ve been talking about weak basis. We’re gonna talk about that more a little later. At the river markets because of weak export demand. USDA is forecasting a rebound in exports in ’23, but it still doesn’t take us back to where we were in ’21 or ’22. In the ’20 crop, we had exports of 2.75 billion bushels. They’re forecasting 2.1, so that’s about 650 million bushels less than we exported in 2020. It is up about a little over 300 and almost not quite 400 million bushels compared to where they had us at, at the ’22 crops. So that’s the good news, but still not recapturing that market share that we had previously. Right?
Nathanael Thompson: At least in recent months, the lack of export demand for U.S. corn has certainly weighed heavy on basis at those river markets. And so it’s good to see a projection that we could see those recover. But again, yeah, it’s not gonna be back to the levels where we were several years ago.
James Mintert: And, you know, it’s a little hard to project at this stage. But it doesn’t suggest that those river markets are going to be extraordinarily strong in the upcoming marketing year. Right?
Nathanael Thompson: At this point, yeah, that doesn’t seem to be the case that they’re gonna be strong. But again, it’s, we’ve had an interesting couple of years as you think about river markets, you know, we’ve gone from extreme drought to flooding at the river, and that has had also big impacts on basis.
And so there’s more factors at play there. So again, you know, time will tell as we get to harvest for 2023 crop what’s going on with the river, kind of physically, as well as what’s going on in these export markets from a demand perspective.
James Mintert: You know, I wrote an article that we posted on our website a few weeks ago talking about the weakness in corn exports and the likelihood that we were probably not gonna be able to hit USDA’s target with respect to exports and in fact, they did reduce exports a little bit.
So, I thought it’d be interesting to look at, well, where’s the competition? Becuase that was one of the questions that article kind of raised. And I think as soon as I posted it, somebody sent me that question and said, well, you know, what else is going on here? And so let’s take a look at South America in particular. If you look at corn exports coming out of
Argentina and Brazil and looking back almost 25 years going back to 2000. You know, you can see both of those have been in a fairly strong uptrend. There’s definitely some variability. The corn exports coming out of Brazil are a little more variable than those coming out of Argentina, but the growth is really been strong, especially coming out of Brazil these last few years. If you go back to 2020 is probably a little bit of an aberration, but if you go back to say 2019, they were exporting about 1.5 billion bushels of corn. It fell pretty sharply there in the 2020 crop year. But if you look at ’21 and they bounced back to 1.9 billion bushels the ’22 crop year two, 2.17 billion bushels is USDA’s current estimate for the 22 crop year.
And they’re forecasting about the same number for Brazil in ’23. Argentina’s had a couple of tough years with respect to weather problems. But they’re forecasting a rebound there of almost, not quite, 1.6 billion bushels coming out of Argentina. And you put those two together. Those are big numbers.
You go back to the beginning of this particular chart that we’re looking at, go back to 2000. On a combined basis, those two countries had trouble busting through a half billion bushels.
Nathanael Thompson: Yep.
James Mintert: So it’s, it’s a huge change over the span of 20 to 25 years and a big chunk of that change occurring more recently.
And then the other story on the export side is what happened to the Black Sea region exports? If you take Ukraine and Russia and combine them kind of looking at that Black Sea region on a combined basis. The surprise story is out of the ’22 crop that exports out of that region essentially held constant with the prior year.
So exports coming out of that region in the ’22 crop year, 1.23 billion bushels, virtually unchanged from the prior year. And you know, that’s an astounding number, right?
Nathanael Thompson: It is.
James Mintert: The ability to move corn out of that region was way better than probably anybody, myself included, thought possible last spring. Last spring, we were all dialing back with respect to what the exports might be out of that region. They were able to get it out of there in a variety of different ways. Some of it legitimate, some of it not so legitimate, but nevertheless, they moved the corn. USDA is forecasting a reduction in exports out of that Black Sea region for the ’23 crop year, but only down a little over 300 million bushels.
So, still relatively strong. And part of that is because of just reduced production coming out of Ukraine, with respect to their ability to put a crop in the ground this spring. So then you combine those and look at those on the same chart, you kind of start to realize what’s going on here. The growth in exports coming out of the South American countries has simply swamped the losses that came out of the Black Sea region.
And so on a worldwide basis, you had more corn exports available and more corn shipped from countries other than the U.S. more than compensating the losses that we experienced in, in that Ukraine and Russian market. And that just wasn’t what we thought was going to happen last March, April and May. I mean, the talk was all of just how little corn was gonna be able to move out of that region.
And instead it was surprisingly close to normal movement. So again, just where’s that leave us in terms of prices, the USDA is forecasting a market year average for the ’22 crop of 6.60. That was up from $6 in the ‘ 21 crop. And now for the ’23 crop, their estimate is $4 and 80 cents, so a decline of a $1.80 compared to the ’22 average.
And that’s really all based on their expectation for that really large carryover going from, in ballpark numbers, about 10% carryover of usage to roughly 16%. And so, you know, what takes place this summer with respect to crop production is going to have a huge impact on how that plays out.
But the market, especially before this rally that got started here the last few weeks, was really anticipating almost exactly what USDA is forecasting. Namely the 92 million acres, and the trend yield of 181.5. That took December corn down below $5 for a few days. But these last couple of weeks as we have been more concerned about weather, more concerned about drought, and the possibility that the yield number could come back off of that 181.5 has enabled us to put almost 60 cents on Dec. corn.
So Dec. corn a little bit before we recorded today was trading at about 5.58. And as I mentioned before, it had a low of just a little under $5. So you know, Nathan, neither one of us are big chartist but we’re looking at a chart and you have to think about, well, where’s the next point of resistance on that chart?
The next target’s probably gonna be somewhere in that vicinity of about 5.70 – 5.75.
Nathanael Thompson: Yep.
James Mintert: And then actually some stronger resistance perhaps up in the vicinity of about $6. Those would be the next couple of dollar next couple of targets for corn. If we continue to have dry weather and people continue to have concerns about what’s taking place with respect to yield. But it’s early.
If we start seeing a change in the weather patterns and we start seeing moisture improve crop condition, ratings improve. It wouldn’t be too surprising to see us come back and challenge those lows that we put in here roughly two and a half or three weeks ago.
Nathanael Thompson: That’s exactly right. I mean, it’s really a daily paying attention to what the forecast is gonna swing these markets over the next probably four to six weeks.
[00:16:17] Purdue Crop Basis Tool Update
James Mintert: So you’ve taken a look at the updated crop basis tool and I think it’s important to just maybe to start here. For folks that haven’t looked at the crop basis tool lately, tell us a little bit about the enhancements because you’ve completely redone the tool and it is a much different tool. To me a much better tool than what we had before.
Nathanael Thompson: Yeah. So we made some improvements. Kind of rolled those out, I don’t know, probably a month ago now. So if you haven’t had a chance to look at it, I mean the basic improvements or changes, you know, the overall structure’s the same. You’re looking at the, the same sorts of data.
But number one being, you know, we’ve always had the regional basis data in Illinois, Ohio, Indiana and Michigan. We’ve added the state of Iowa. That was a request that I frequently get from users, people, you know, that, that are doing business out that way, or people out that way, you know, we’re curious if that was something we could do.
And it’s a big task to add states, but that was one that I frequently get asked about and was able to include in this most recent update. So that’s, you know, from kind of the regional basis perspective, that’s the big change there. In addition to that, you know, on the webinars that we do every month, I, for several years now, have been tracking ethanol plant basis for the state of Indiana.
Soybean processor basis for the state of Indiana and kind of Ohio River basis kind of as a proxy for, for what’s going on in those export markets. And those are really things that I tracked personally and we’re not as a part of the publicly available crop basis tool. So those are now part of the tool.
So you can look at ethanol basis, not only in Indiana, but all of the states that are covered by the crop basis tool. So, and again, that’s a state average, but it’s useful to think about how those markets may differ from other markets. Soybean processor, same thing. State level you can get that for any of the states.
And then the Ohio River basis is obviously, it’s not a state, it’s just kind of averaging across Southern Ohio, Southern Indiana, Southern Illinois taking all of those, those terminals that are on the river and averaging together. And again, so those, those weren’t previously available. There were things that I talked about, but now it’s really nice to have them as part of the tool so folks can look at those for themselves.
And again, all the same inputs. You know, you can select obviously whatever futures, contract month you wanna look at nearby or deferred futures, contract months. Same idea where you can look at historical averages relative to the current crop marketing year. You know, pick whatever years you want to average across.
Another kind of new feature there that you can kind of see on what we’re gonna talk about in the next couple slides here is not only can you look at those historical averages, as well as the current marketing year, but you can add any individual year you wanna look at and kinda layer those on top of each other.
That was something that I always, again, I did some of that with my own calculations, but was never really part of the, the previous version of the tool. But it’s useful because we talk a lot about, you know, similar years and whatnot and I’d have to show, you know, numerous charts or just average across those years.
Now you can really look at those individual years and kind of dig into, you know, how do the patterns this year line up with those? So anyways, those are kind of the updates.
I don’t know if there’s anything else you wanted to add to that, but those are the main new things that are part of the new version of the tool.
James Mintert: Yeah. It’s just a lot more flexible than the old tool.
Nathanael Thompson: Yeah.
James Mintert: The old tool is pretty good. This is a really, a much nicer version, I think.
Nathanael Thompson: Yeah.
James Mintert: So I really like the, the enhancements, especially the fact that you can look at the ethanol plants, you can look at the river basis, you can look at the soybean processor basis.
Nathanael Thompson: Yeah.
James Mintert: That, to me was huge.
Nathanael Thompson: It’s a big improvement. Cuts down on my work time too. Getting ready for these webinars used to take me, I don’t know, an hour. Now I can do it in five minutes when I just go take the chart straight off the website. So it’s great for me. I’m really happy about.
James Mintert: And I did a little of that today myself, so we’ll, we’ll talk about that in a few minutes.
Nathanael Thompson: So, yeah. So then if we just wanna start out kind of talking about what’s going on with corn basis. You know, I always start with kinda just central Indiana as baseline of what’s going on. I think the most important thing to take away here is looking, you know, at what’s going on this current year compared to the historical three year average, you know, we followed a pretty similar pattern for basis for most of the year, but coming about March, we really saw a deviation with basis in the current year strengthening at least relative to that July futures contract quite a bit. So, you know, we were running probably 20 to 25 cents above the historical average, which is, you know, a lot of strength.
There’s a number of things going on there. I think part of it being kind of tighter carryovers as we move towards the end of the crop marketing year. Drove some of that strength and basis. Now you’ve mentioned, right at this point, as we look forward, we’re expecting those carryovers to really improve going through the ’23 crop year.
But at least for now, as we are finishing out that ’22 crop marketing year, we have somewhat tight carryovers and that has led to some strength there in basis. But what’s really started to happen is we’ve seen that maybe start to change. And again, that changes dependent on kind of what you’re looking at regionally or what you’re looking at, like you mentioned, whether you’re looking at maybe a river market and what’s going on with exports or looking at ethanol plants. And we’ll talk about that in the next couple of slides. But in addition to showing this kind of looking at it relative to July. That’s really a near term forecast, because if you think about it, the July contract’s going to go off the board here in the next four weeks or so.
And so I also wanted to look at, okay, you know, if, if we expect basis to, you know, be kind of what it is and really start to weaken as we move towards expiration of that July contract here over the next couple of weeks, well what’s gonna happen, you know, a little bit longer term, maybe through the end of the summer.
And so to do that, I, I just looked at the same chart looking at the September corn futures contract. And again I think the main takeaway that I want to say from that is based on 2020-2021 as a similar year. I don’t think I mentioned that on the previous discussion, but, so I’ve included 2020-2021 crop marketing year as kind of a litmus. We’ve, we’ve done some different podcasts and written some different articles about what’s going on with basis here in the last couple of months. And we’ve been using that year as a comparison year, becuase again, it’s not the same as what’s going on this year. But in 2020-2021, we saw big increase in demand for corn from China.
So kind of export, market driven. And that led to quite a bit of strength and basis that year. That’s not exactly what’s happening this year. This year, kind of tight carryovers. Both supply and demand really kind of playing into that. And so the factors that are motivating aren’t the same, but the important piece to be that, you know, in a, in a year where maybe we have some tight carryovers, and that leads to maybe some inversions in futures markets, which we’ve talked about in some of our previous stuff.
That leads to the potential for some strength in basis. So if you use that year as kind of a proxy for maybe a year where we had some similar conditions, obviously basis has followed a similar pattern to that this year. And if you look at that September contract and you’re trying to forecast out, the main point that I want to make is, you know, maybe basis could stay strong relative to that September contract through the remainder of the crop marketing year, but not a lot of potential based on that 2020-2021 marketing year to think there’s a lot of upside potential on basis there.
Probably more of a weakening, a slow, gradual weakening as we move towards you know, harvest of the ’23 crop. The thing to keep in mind there though, and we talk about this a lot, we did some research several years ago with a graduate student in this June, July, August timeframe, basis is just extremely volatile and extremely difficult to predict, right?
And so there’s a lot of factors that can come into play. Weather, obviously being a big one. And so, you know, if we see continued dryness. There certainly could be strength in basis as people who need to get corn, you know, this summer are going to need to pay for it because we’re going to want to be carrying some of that over when we know we’re going to have a potentially shorter crop.
And that the opposite would be true as well, right? So if we get the timely rains that we need, given some of the dryness that we see in the Midwest, we could see basis again, weaken more than than what we see here. So both of those are in play. Extremely volatile, but just trying to think through some of the factors that that might impact that.
James Mintert: So the Ohio River has been kind of interesting. We’ve been watching that really going back to last fall when we had such dry conditions in the southern part of the Mississippi River. Right?
Nathanael Thompson: Yeah. We’ve seen some pretty wide swings down there. And again, so if you even start back last fall, dryness in the river resulted in the inability to really move corn or at least move corn at reasonable shipping rates and that just hammered basis. What was interesting to see those, and you can see this on the chart, that recovered relatively quickly, which I think was somewhat of a surprise as things started moving along the river some of that kind of normalized and really we got back to normal, quote unquote normal.
You know, the, the historical three year average by the end of the year, probably by the end of December really. And then what’s interesting is we went from that extreme weakness to really, again, similar to what I was talking about with that regional basis. You know, at the river we saw strength in basis starting at about March.
Again, probably more than what we saw in central Indiana. So probably more like 40 cents above that historical average. So a lot of strength. But again, like I mentioned, what we’ve seen is in recent weeks that strength has started to erode and in in particular the river market is one place where we’ve seen that.
And again, it comes back to our discussion previously. Of what’s going on with, you know, U.S. exports of corn. And continued weakness there has just started to chip away at kind of what basis levels are down there at the river market. And we’ve seen a big decline there, basically starting about the beginning of May, back in line with that historical three year average.
And so again, if you look at kind of what the expectation is there, we’re really in line with that historical average and would expect that to continue to kind of gradually weaken as we move towards. The ’23 harvest.
James Mintert: So there’s probably a good time to point out, if you’re looking at the crop basis tool, you can hover over the individual data points on that and get the actual numbers.
And this chart that we’re looking at now, which is the Ohio River Corn basis chart for the July contract, is a case in point where that’s really useful because the swings have been so big that it’s a little hard to tell exactly, you know, if you look at the decline or weakness and basis, we’ve experienced since late April, early May, It’s about 25 cents a bushel, right?
Nathanael Thompson: That’s right. Yeah.
James Mintert: I mean, it’s been a big move. The chart maybe hides that a little bit because it doesn’t look that like that much space, but it’s really a pretty big move at about 25 cents and we’ve seen it just bouncing around since then. But that’s enough to make a big difference on returns, right?
Nathanael Thompson: It is. I mean that’s a great point. And again, it gets back to our discussion earlier of last fall. It also puts into perspective the extreme weakness of basis, you know, dollar under that we saw last fall and because of the charts moving down to, to even show that. It kind of hides some of what’s been happening recently, and that’s just kind of the nature of, of how you build a chart, but you’re absolutely right if you hover over those, you can see.
And again, I, I agree. I think that you really gotta to, to look at those values to see how much of a decline in basis we’ve seen at those river markets in the last, again, three, four weeks.
James Mintert: Yeah. If you just take your mouse and hover over the individual data points, the actual numbers just pop up on your screen, that could be pretty useful.
[00:26:50] Ethanol Plant Basis
Nathanael Thompson: So then kind of the last piece to kind of round out this discussion from a corn perspective is just thinking about what’s happening at ethanol plants. So again, this is just looking at Indiana in particular. If, you know, if you’re in different state, you could get the same information for your state.
But I’m looking at Indiana, so it’s just averaging all the ethanol plants in the state of Indiana in kind of one, kind of index of ethanol plant basis. Pretty similar story there where you’ve seen, again, very strong basis at those ethanol plants, going back to about the beginning of March. And that has stayed relatively strong.
And, you know, it hasn’t really continued to strengthen, but has, has stayed pretty flat right there, 40 cents over that July of futures contract, really for, you know, going back to the middle of, of April. And again, the same things that I said regarding some of the other kind of basis values are at play here.
And that is, you know, as we approach expiration of the July futures contract, the chart would imply, right. We would see that kind of weaken, but again, ethanol plants in particular, we could see some volatility in basis here as we move through the remainder of the summer, given that ethanol plants are one of those end users who, it doesn’t really matter what’s going on, they need corn.
Right? That’s, that’s what happens at the end of the day. And so when you, when you think about years where crop is short in those summer months, ethanol plants are really the prototypical example of seeing huge basis plays come into the picture. And so, for example, if we see dryness continue, and, and people really do start to worry about the condition of the ’23 crop, you know, we could really see big swings in ethanol plant basis.
Now, that also is, is kind of counteracted by this idea that we have maybe weaker export demand. So you would assume that potentially there would be more corn available for these ethanol plants. So again, that may be impacts some of that swing, but really paying attention to what’s going on with weather here over the next several weeks is gonna have a big impact on what happens at basis at these ethanol plants.
James Mintert: You always talk about basis reflecting local supply demand conditions. And to me, when I look at ethanol plant basis, it truly does.
Nathanael Thompson: Yeah.
James Mintert: I mean, you can really see. What happens in the local market within a 50 to maybe a hundred mile region of those plants. If crop conditions deteriorate in that part of the state or in that part of the region, that tends to impact those individual plants ethanol basis.
And so some of that’s not fully reflected in the averaging that we do, but a lot of it is.
Nathanael Thompson: Yeah. Yeah, that’s exactly right. It is an average across several, so you do have to take into consideration some of those regional differences, but you would certainly pick up on some of that if, if it was a big enough difference.
[00:29:26] New Crop Opportunities
Nathanael Thompson: So then shifting our focus away from maybe what’s happening in, in current basis markets, thinking about kind of old crop corn to new crop opportunities. We talk about this frequently on the webinars. And so I think it’s, it’s useful to continue that. But I also wanted to kind of put another plug in for the new version of the basis tool and kind of, you know, in the past I just kind of pass over where I got these numbers and, and haven’t really done a lot to explain it because you, you couldn’t get them out for yourself, so to speak, right?
You had to do some kind of back of the envelope calculations, whereas now the new version of the basis tool will allow you to replicate some of what I do here. So I kind of just wanted to walk you through what my thinking is, right? So as I think about these new crop opportunities, as we sit here today in June, I’m looking ahead saying, okay, well I’m gonna use December ’23 corn futures.
So this morning those were at 5.53. They’re up a little bit today, but again, that doesn’t make, you know, huge difference. Maybe, maybe a nickel. Up from, from where I have there. And then I’m saying, okay, well if I’m looking at fall delivery, how am I going to come up with my expectation of basis for fall delivery in the fall of ’23?
So what you would need to do is you need to look at the most recent three years. In the old crop basis tool, like we didn’t get those most recent three years until we fell into the new until we got to September, right? You, you couldn’t really look at it until you got to September. Now, the way that I have it set up is it defaults to the most recent three years.
So, you know, as we sit here in the end of the ’22 Crop Marketing year, the most recent three years would be 2021-2022, 2020-2021, 2019-2020. But the 2022-20 23 data, this year’s data, is available in the tool. And so if you go in and you just change the default of that historical average, and you get rid of 2019- 2020, and you add in 2022-2023, which is what I’ve done here, then you basically get next year’s historical average. You’re getting that prediction or that expectation of what basis is going to look like next year before we get to September. So again, that’s not a huge feature, but I think it’s really useful as we think about kind of new crop marketing and what kind of expectations of basis and the coming crop marketing you’re going to be.
So that’s what I’ve done here on this chart. And if you look at that, you end up with an expectation of basis, you know, in that October fall delivery timeframe of about 25 cents under. So again, that’s a number that I’ve used for a lot of years, but now you can see where I’m getting that from. And again, that will change year to year. Depending on the historical years that are in the average.
James Mintert: And there was a way you could do that sort of back of the envelope, right, which is what you and I were doing. But you had to mess around with the historical and back off that a little bit and add back in the current year. And you could do that by hovering over the mouse and, you know, messing around and do using a spreadsheet. Now you can do it almost instantaneously.
Nathanael Thompson: Yeah.
James Mintert: Which is really cool.
Nathanael Thompson: Yeah. It’s just kind of explicitly done for you if you kind of understand what you’re adding and taking out. So yeah, it just, ease, right? Like it’s nothing more than convenience, but I think it’s a good feature. And again, now I can show you, you know, on a chart what that looks like. You can replicate that for your particular situation or region or whatever you’re wanting to look at. So anyways, you take that 5.53 corn futures price, a 25 under basis, that puts you at an expected cash price for fall delivery of $5 and 28 cents. You know, we don’t have Michael’s break even stuff in here, but he did send some information.
I mean, that’s well below where he’s at on breakeven price for corn for the ’23 crop on average productivity soil. And so again, It’s not the end of the world. You know, maybe you’ve done some pricing earlier this year when, like we said, prices have have been quite a bit better. But it does get your attention in terms of what’s going on, where markets are, where costs currently are. And as we think about income in the ’23 crop year, we’re not looking at 2022. We’re not looking at 2021. So we need to start thinking seriously about what our marketing alternatives are going to be moving into that ’23 crop year. Because again, we’re below breakevens there, at least at current price levels.
James Mintert: And that is significantly stronger than it was just two and a half or three weeks ago.
Nathanael Thompson: Right, exactly.
James Mintert: We were well below $5 at that point.
[00:33:22] Futures Price Distribution & Breakevens
James Mintert: So you took a look at the Illinois Price distribution tool to look at the risk of prices going up and down from current levels. You might share that with us.
Nathanael Thompson: Yeah, so that’s kind of the last piece here. Obviously we’ve talked a lot about the basis component of that cash price projection that I just showed you, but there’s obviously also going to be volatility and movement in futures prices.
And the University of Illinois has a useful futures price distribution tool that gives you a projected distribution. Like what is the range of potential outcomes for a particular futures contract. Here I’m looking at December ’23 corn futures. So what does that distribution of new crop corn futures really look like between now and expiration? What kind of potential prices could we see that contract go off the board at? So again, obviously current prices are most heavily weighted in that distribution, right? Most likely outcome would be when prices are about what they are now and that 5.50-5.60 range. But what I think is useful to give maybe some more of some endpoints on that distribution, we frequently use the 25th percentile and 75th percentile as useful targets. You’re not looking at the extreme lows or the extreme highs, but you’re looking at a number that’s somewhat reasonable in terms of a potential outcome. And so if you look based on kind of current volatility, current price levels, it’s estimating that there’s about a 25% chance we could see that December ’23 corn futures contract go off the board for $4 and 75 cents or less. Which that’s a 75 cent or so decline from where we’re at now. But that 4.75, and that’s not adjusted for basis. Right? So that 25 cent under basis will put you at a 4.50 cash price for fall delivery.
That’s a big difference from where we’ve been in recent years. And, and again, 25% chance of that happening. That’s, that’s not negligible by any means. On the other side. Right? There is upward potential here. The 75th percentile there has you at a December ’23 corn futures priced of $6 and 14 cents.
So again, that’s an increase from current price levels, not quite at that 75 cent range, maybe 65 cents or so. Again, adjusted for basis. I put you in the, the high fives for a cash price, so maybe 5.90 or so. That is much more in line where with what Michael is projecting on his breakevens for ’23 crop in terms of average productivity soil.
And so again, you know, getting to just breakeven levels is a pretty optimistic scenario, at least based on current prices and current volatility in that distribution. So again you have kind of some, some targets here in terms of where we currently are, maybe a lower level price range, a higher level price range, and that can help you kind of start doing some budgeting.
But I also think it becomes helpful as you think about maybe some marketing strategies for that ’23 crop. What are the targets you’re really shooting for in terms of price levels?
James Mintert: So I looked at your projection for December and I thought at 25 cent under basis that you were projecting. I thought, well surely I could do better than that if I’m selective about where I market. So
Nathanael Thompson: sure.
James Mintert: I went back in and I did exactly what Nathan described earlier. I took a look at the tool. And I said, well, what if I’m moving that corn instead of just a typical central Indiana market?
What about moving it to an ethanol plant and using the Indiana ethanol basis, and all of a sudden that basis looks better? No big surprise.
Nathanael Thompson: Yep.
James Mintert: And again, as you indicated, I was able to go back in and include the current year’s data and have an updated three year average. And instead of about, you were at minus 25. Yeah, the average would be maybe minus a nickel to maybe minus a dime, right?
Nathanael Thompson: Yep.
James Mintert: So things look a little bit better if you can have an opportunity to move it into an ethanol plant, right?
Nathanael Thompson: Yeah, I mean, I think that’s absolutely right, and again, that’s the value of being able to kind of do some of this.
And again, that I, I didn’t mention this earlier, but that does line up with, you know, I looked at some, some cash bids for fall delivery today, you know, forward contract bids. And that’s really in line when I looked at some of the typical elevators, county elevators. 25 to 35 under was kind of where they have their bids for current Ford contract bids for fall delivery.
I also looked at some end users and they’re in that 10 under or so range. And so certainly where you’re selling, looking around what the different bids are because the whole reason we built this tools, because those basis bids are not the same everywhere and they do change over time. And that was our home motivation here is to get that message out. And that’s exactly what you’re showing here is you really need to look around and maybe that 20 15, 20 cent difference between what I’m showing at a normal county elevator and what you’re showing here for an ethanol plant. Maybe it’s worth hauling the extra.
James Mintert: Yeah, I mean, that’s a lot of money per acre. Let’s, its put it that way, right? It is potentially.
Nathanael Thompson: Yeah.
James Mintert: If it’s a, within some reasonable distance of your, of your market. So with that, I’m gonna wrap up our discussion for today. Thanks for joining us on this issue of the Purdue Commercial AgCast.
We’ll have more information a little later this week focused on soybeans. And so on behalf of the Center for Commercial Agriculture and my colleague Dr. Nathan Thompson. I’m Jim Mintert. Thanks for joining us.
December 13, 2023
The 2023 Ag Tax Webinar, part of the Purdue Income Tax School, will provide in-depth coverage of selected agricultural and farm income tax issues to supplement material provided at the two-day in-person or virtual tax schools. The 2023 webinar will be taught by Guido Van Der Hoeven, an expert on agricultural tax issues and one of the authors of the 2023 Agricultural Tax Issues book, on Monday, December 13, 2023, starting at 9:00 am ET.Read More
January 5, 2024
A management programs geared specifically for farmers. Surrounded by farm management, farm policy, agricultural finance and marketing experts, and a group of your peers, the conference will stimulate your thinking about agriculture’s future and how you can position your farm to be successful in the years ahead.Read More