Driving to a site visit this morning in Northwest Iowa I went past quite a few country elevators. In the past with ‘normal’ yields there have been huge piles of corn stored on the ground at these locations, often 1 million or more bushels in some of the piles. Even with the very dry August conditions in the region, most producers will tell you they had ‘average’ corn yields this year. Yet, there was very little corn stored in piles at the country elevator points I passed this morning.
When corn is stored in an outside pile at a country elevator, the elevator is the owner of the corn in the pile as they cannot issue a warehouse receipt for outside, uncontrolled storage. With less corn outside, this suggests less corn was sold at harvest this year than was typical in previous years. I think this is showing up in the corn basis.
Historically, the corn basis at harvest in the SW Minnesota/NW Iowa region was as much as $0.50 below Chicago. Currently, the statewide average basis in Iowa according to the USDA is averaging only $0.03 below Chicago. This basis change is worth $0.47 per bushel, not a small consideration in the grain market with cash corn bids around $4.00-4.10 per bushel.
This suggests corn is being stored on-farm with producers not selling. As you drive country roads you can’t help but notice the large investments many producers made in on-farm storage and handling systems in the past few years.
If they had a reasonable crop last year (or collected crop insurance) they have had a lot of income this year already and in many cases don’t want more income so are deferring all sales until after January 1. To get grain to supply feed mills elevators and feed mills are having to bid up the corn price enough to entice producers to sell and face higher income tax consequences – something they really hate to do.
Will corn prices fall further after January 1? I know a lot of market advisory services are doing a lot of talking about this topic. My two cents worth – I think yes. Once the tax consequences of a sale this year are history, producers will begin to sell corn in order to finance next year’s crop inputs. At $4 per bu versus $7 last year, it will take a lot more bushels of sales to get the next crop in the ground. While producers have become better at using marketing tools such as deferred pricing, Chicago futures, etc., there are still many producers who’s only market decision is ‘how can I avoid paying income tax’. I think there are still enough of this type of grain producer that we will see the impact on the market after January 1.