Many of us working in the swine industry are aware of the impact of corn prices on our feed costs in a general way. However, we don’t often think about the actual problems local feed mills face in keeping a steady supply of corn coming into the mill for our needs.
As we go into the corn planting season this year, getting corn delivered for our feed needs is becoming a growing challenge for feed mills in the upper Midwest. Evidence of this is the tightening corn basis.
I receive a daily USDA report on average corn prices across Iowa, along with a basis (difference in price versus nearby Chicago futures price). This basis has been narrowing and now stands at -$0.18/bu. This compares to the previous 5-yr average basis of -$0.33 in April.
However, the average Iowa basis doesn’t tell the whole story. I routinely follow the cash corn bid at several locations across Iowa and the local basis is now at $0.00 or even slightly positive. I have seen several ethanol plant bids also nearing $0.00 basis.
This suggests that corn supplies are in very strong hands and owners of the remaining 2011 crop aren’t in any hurry to sell this crop. In order to get grain, bids must be $0.30-40/bu above historic basis relative to the nearby Chicago futures price.
Beginning with late September bids for the 2012 crop, basis levels drop back to historic levels of -$0.40 or more. New crop corn bids are now below $5/bu at many locations in Iowa.
All of this discussion of local corn basis patterns suggests an interesting summer for feed ingredient prices. The difference between buying corn on the Chicago futures market versus actually paying for corn at a local mill will have a big impact on cash flows. Many producers have purchased a good share of their feed grain needs using Chicago futures prices along with selling a portion of their live hogs in a similar manner. If they didn’t account for the tightening of the corn basis it will result in less profit than anticipated.