Wild 2 days in Chicago futures

The $0.50/bu decline in corn prices for the March, May and July contracts the past 2 days following yesterday morning’s USDA report is the talk of Midwest agriculture. If you’re a grain seller, you’re suddenly going to make plans to hold corn for a period of time to see if the market recovers some of this loss (about 8% drop in value in 2 days). If you’re a buyer of corn (i.e. pork or chicken producer), you may suddenly be trying to forward price more of your feed needs.

In the middle of all of this is the basis. Up until 2 days ago, the average corn basis in Iowa has been running about $0.27 under Chicago. However, local elevators and ethanol plants have been paying a smaller basis to access corn on the spot market to fill immediate needs. I suspect that next week we’ll see widely varying basis bids as local coops, mills and ethanol plants react to the price crash that came with this report. Mostly I think the basis will have to narrow to pry corn loose as sellers wait for some return of corn prices.

On the other hand, the drop in grain prices (corn, soybeans and wheat) have lean hog futures climbing with February hogs up $2.70/cwt the past 2 days. This suggests a very strong profit outlook for the US industry this spring and summer.

The big unknown now is pricing of ddgs. In addition to a sudden change in corn prices (and local basis bids), we’ve got the ending of the blenders credit from the federal government and the move by most ethanol plants to remove more corn oil from their distillers grains. The historic pricing of ddgs that many of are used to thinking about is ddgs priced at 85-90% of the value of corn on a lb/lb basis. With all of the market turmoil, and all of the changes occurring at ethanol plants, what will be the new pricing of ddgs? Add to that questions about the relative feed value of new process ddgs (generally containing 7.5-8% oil) vs old process (10.5% oil).

While the decline in feed grain prices along with the rise in lean hog futures are comforting, there is enough uncertainty that risk management is still the underlying management strategy for pork producers.

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