High Plains Journal:
Sorghum Basis Higher Than Corn, for Once
By Kylene Scott
*This article was taken directly from the High Plains Journal - August 24, 2020 Edition.
McPherson County, Kansas, farmer Adam Baldwin has found it's essential to go out on a limb - especially when it comes to his sorghum crop. In recent years, Baldwin has begun to be a little more aggressive with his selling.
"We've been growing milo forever here," he said.
His operation is split equally between wheat, corn, sorghum and soybeans. In his area, planting choices have shifted and sorghum acres declined as farmers went to soybeans and dryland corn as the crop genetics improved. In McPherson County, interstate 135 is generally the dividing line for what crops get planted.
"West of 135 is where milo is probably, in general, a better fit and east is where corn is probably a better fit - assuming normal market dynamics," Baldwin said.
On his dryland acres, yields between corn and sorghum are normally fairly similar and the input costs "aren't that far apart." "A lot of times the determining factors are either quality of the ground or the price ratio between corn and milo," Baldwin said. "Normally corn's maybe at a $0.30 premium to milo. So that basically makes up for the difference in seed costs."
But in mid-July the basis for new crop sorghum and corn saw a $0.55 difference, Baldwin said, with sorghum having the advantage.
"That changes the entire economic relationship between the two," Baldin said. "Our dryland corn looks like it's going to be really good, but I wish we had less of it and had more milo."
Historically sorghum has higher demand following harvest, and Baldwin generally does not hurry the marketing process.
"I have way more forward sold than I have typically," Baldwin said. "This year is the first time that I can remember that. They're really pushing basis."
In the past, he's sold earlier than now. Baldwin thinks the pandemic and subsequent economic turmoil has caused a shift in the way some farmers are marketing their grain.
"I think there's way more downside risk," he said.
He's got mostly basis contracts right now, and hasn't necessarily set the futures price."
"I have several hedging strategies," he said. "We're probably over 50% sold; maybe not with a set price, but with the floor."
Baldwin said he's trying to make a concentrated effort to be more aggressive early on with his selling strategies.
"We have a lot of production risk here so I'm using the board or option strategies a lot more than, say, the last five years," he said. "Normally options are, I think, too expensive. But you can find times where you could buy a put and sell a call. Give you a floor and a top end where a marketing window where you could put some protection on for not a lot of money."
Finding a niche
Farmers need to pick their time to make it work, and for the last several years his strategy has worked because he took the time to actively manage it.
:When you have historic bids on grain, on sorghum, if guys are locked in to some of that, I think there's just a point of view - you need to take some chips off the table. And if they're offering historical premiums, guys should be willing to try to take advantage of that," Baldwin said.
The "really strong basis" isn't being seen everywhere, and that might frustrate those producers who aren't seeing it. In the past, Baldwin has sold grain to companies out of his marketing area. It takes a little extra leg-work, but he's found it worthwhile in the end.
"There's always opportunity to leverage your local grain guys," Baldwin said. "You have to keep your eyes open and be reaching out to people."
Basis impact
Brady Huck, a risk advisor with Advance Trading inc., of Dodge City, Kansas, said basis has a big impact on a producer's local flat cash price, as well as giving them the opportunity to forward contract.
"Basis is the difference between cash and futures prices. Cash minus futures prices. Cash minus futures," Huck said. "Basis can be either a negative or positive number versus futures."
Sorghum has had dramatic swings over the last 10 years, and it's important to understand why basis values change, and it can move forward for a number of reasons.
"Oftentimes, basis strengthens to get grain to move, to encourage sales, changing ownership," he said. "When near-term grain needs are met, basis often weakens to slow that movement down. But there are many pieces that impact a producer's local basis, and those pieces are always changing."
Huck said sorghum basis is relative to corn futures and that generates a complicated and interesting dynamic.
"Producers have to be careful how they separate the two, futures and basis, for all commodities but especially in milo," he said. "Basis-only contracts lock in just the basis and leave the futures component open. Setting the basis, or using a basis contract creates a production or delivery commitment for the producer."
Basis only contracts are attractive when futures prices are low, relative to recent memory, and basis is firm.
"If we don't manage the futures side of the equation and corn futures continue lower, like we saw this spring, basis only contracts can get ugly quick," Huck said.
Huck believes another way a producer can capture the attractive basis right now while still retaining the upside and defining their futures risk would be to make a cash or forward sale and use call options instead of doing basis contracts.
"When basis is weak and futures are strong, producers can use hedge-to-arrive contracts, futures contracts or put options to protect attractive futures values and lock in market carry while we wait for better basis opportunities," Huck said.
Grain sorghum demand is very sensitive to political changes, and China's potential demand for it can easily tighten the United States balance sheet, Huck said.
"When milo is a discount to corn, it finds demand by pricing into ethanol and feed," he said. "When China is a buyer, milo basis often becomes a premium to corn. While it is great to see this renewed export interest, it warrants some caution, as we know how volatile and unexpectedly global trade can change."
Florentino Lopez, Sorghum Checkoff executive director, agrees with Huck on the Chinese influence. He also sees a relatively low supply equating to the basis appreciation for sorghum in 2020.
"Sorghum does not typically see this basis level this early very often with a lower board price," Lopez said. "If the current corn price is below the cost of production, basis appreciation plays an even larger role and is a great way to get closer tot the farmer's cost of production or even make a small return."
Lopez believes understanding basis is important for producers because if they don't it can be costly.
"If you study the way basis fluctuates throughout the year long enough, farmers will begin to recognized those time periods when grain is at historically high values, knowing when to lock it in," he said. "Overall, awareness in basis for any commodity is a means of strengthening prices received."
Constant changes in the market due to supply and demand, have at least for sorghum, been evident since the first of July. During this time, December corn prices have gone from $3.63 to $3.33 in the span of two weeks.
"This along with the dramatic changes in basis could mean substantial gains or losses for producers," Lopez said. "That is why it is so critical to have a marketing plan and to be constantly looking at the factors that give you a better understanding of markets and potential value."
Kylene Scott can be reached at 620-277-1804 or kscott@hoj.com.
*This article was taken directly from the High Plains Journal - August 24, 2020 Edition.
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