Analyst: River closure shouldn't devastate basis levels

Barge loading in Fulton County. (Photo by Dan Grant)

Barge loading in Fulton County. (Photo by Daniel Grant)

By Daniel Grant

One side effect of the planned closure of the Illinois River for summer 2020 maintenance involves uncertainty about crop bids and basis levels.

A large portion of delivery houses on the Illinois River for the CME Group delivery system are located north of the closure area. That area on the Illinois River stretches from the La Grange Lock and Dam 7.8 miles below Beardstown to Brandon Road Lock and Dam near Joliet.

The three-month closure of the river next July through September could impact basis spreads and crop storage.

“A majority of delivery houses are in the river closure area,” said Kent Stutzman of Advance Trading, during a meeting hosted by the Fulton, Mason and Schuyler County Farm Bureaus. “There’s a lot of things to look at.”

Under the Illinois Waterway Delivery System, the location differential and load-out charge are added to futures market prices. Market participants then compare this price at the delivery point, or shipping station, to cash prices to make delivery decisions, according to CME Group.

Delivery systems in the futures market exist to ensure convergence of cash and futures prices during the delivery month, CME Group noted.

However, a very small amount (about 1%) of all grain futures positions end in physical delivery. Facilities on the Illinois River are primarily throughput, handling large quantities of crops with minimal storage capacity through shipping certificates.

Related: Corps of Engineers looks to minimize impact of river closure. Read more here.

Stutzman believes next year’s river closure could tighten spreads, cause a slightly weaker basis and widen carry in the futures.

But the overall market impact could be minimal due to advanced planning and the distinct possibility of smaller crops this season.

“The closure might not have as big of impact as we think. If we have a short crop, like 2012, typically we don’t have as much river traffic,” Stutzman said. “(Processors) will pay up to use grain here (for feed and ethanol). Exports are typically the first thing cut in a short-crop year.”

Stutzman suggests this season’s national corn yield could slip to 160 bushels per acre, down from USDA’s current estimate of 166 bushels, with plantings down to 83.8 million acres, down significantly from USDA’s current estimate of 91.7 million acres.

“It seems like our crop is getting smaller,” Stutzman said. “It may be as good of time as any to have a river closure.”

Stutzman believes the delivery area could move down river during the closure, closer to Meredosia, Naples and St. Louis. Local crop storage facilities that have rail loading facilities actually could benefit from the river closure due to increased business, he noted.

CME Group took recent steps to improve convergence in its contracts by raising the storage rate at delivery points from 5 to 8 cents a bushel per month. The move, which takes effect in the November soybean and December corn futures contracts, mirrors recommendations made by the National Grain and Feed Association.

CME Group previously implemented variable storage rates in its hard red and soft red winter wheat contacts that improved contract performance and convergence.

The meeting was one of five planned to discuss the impacts of the upcoming lock and dam repairs. Additional meetings will be held:

* July 25, 8:30 a.m.; Birkey’s Farm Store, Henry; hosted by Marshall-Putnam Farm Bureau.

* July 26, 10 a.m.; 104 Grill, Meredosia; hosted by Cass-Morgan Farm Bureau.

* Aug. 5, 10 a.m.; GRAINCO FS Agronomy, Morris; hosted by Grundy-Kendall Farm Bureau.

* Aug. 6, 10 a.m.; Peoria County Farm Bureau, Peoria; hosted by Peoria County Farm Bureau.

Pre-registration with the hosting county Farm Bureau is encouraged.

Content for this story was provided by FarmWeekNow.com.
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