Seasonal rhythms create opportunity and allow grain businesses greater consistency in allocating capital, cash flow, labor, and other crucial elements of business. Of course seasons will vary, sometimes greatly – this is nature we’re talking about after all, and there are human elements involved, too. But, overall, these cycles are at the core of what we do.
Rhythms are helpful. They are comfortable. They are important. But they can be dangerous.
Grain businesses generate margin on bushels by capturing changes in basis. Seasonality provides the bulk of the opportunity to do this, but awareness, skills, and decisiveness determine how good those margins are and how well the basis trader avoids trouble.
Things start to go wrong when the rhythm becomes a reason not to do something. Sometimes the market provides an opportunity outside the normal pattern. A recent example is from this most recent harvest, especially in the eastern Corn Belt.
Unexpected Opportunity
Harvest was large, and dry conditions meant that it happened quickly. Basis dropped precipitously as storage facilities on the farm, in the country, and at terminals and processors were overwhelmed with corn being dumped much fast than it could be used or shipped.
With no delays, all that corn found a home fast then stopped moving. As fast as it had dropped, basis started rising again as users ate up what they had on hand and needed more.
All of this fits into the concept of normal seasonal basis patterns, with one important exception – it all happened quite a bit earlier than usual.
There are two ways to respond to something happening sooner than it usually does – one is wait for things to get even better. After all, if corn basis usually peaks in Dec./Jan./Feb. and it’s this good in October, it has to just get better from here. The other is to recognize that the opportunity has shifted forward in time and unless there is a severe shortage of corn, it will start moving and put out the basis fire.
Things like this can happen with basis and spreads for any commodity at any time of year. It’s important to be aware of seasonality, take advantage of it, and benefit from it. It’s even more important not to let it overrule your opportunity to lock in good margins.
Philip Luce is chief executive officer of White Commercial Corp., Stuart, FL; Kansas City, MO; phil@whitecommercial.com; @philwcc.
From the Nov/Dec 2024 Issue of Grain Journal