By Elaine Kub
DTN Contributing Analyst
"Learn how to see. Realize that everything connects to everything else."
I suspect that when Leonardo da Vinci wrote those words in the 15th century he was referring to the muscle structures of human and horse anatomy, and he wasn't thinking about natural gas prices and cash bids for corn in North Dakota. But if he were a commodity analyst today, he'd probably say the same thing anyway.
We frequently see commodity prices move together in broadly related trends, and we typically draw connections that are broadly applied to the entire sector. If crude oil and soybeans both move higher during a given trading day, it could be because they are both simultaneously influenced by the U.S. dollar. Or it could be that both are being purchased by a large commodity index fund. Or it could be something less broad and more specific to the underlying mechanics of those markets. Maybe Malaysian palm oil plantings are changing, and all three types of oil are loosely substitutable via the biodiesel market.
There is one of those very specific interconnections going on between our cash grain markets and the energy markets right now, and we have to look at the mechanics of moving commodities across the country to fully understand how the electricity bill you will pay for the lights in your shop may be related to the price you receive for cash grain this year.
The gut slot of the 2015 harvest is nearly upon us -- America's largest volume crop, corn, was 42% harvested as of Sunday evening -- and already we can guess that the industry is going to make it through the season without catastrophic shipping challenges or subsequent collapses in basis bids.
Using the DTN Market Tracker, I took a look at current harvest timeframe spot corn bids at a variety of locations across the Corn Belt. I'm happy to say that everything looks pretty normal for this time of year. In central Corn Belt locations (Iowa, Nebraska), cash corn bids tend to be 30 to 40 cents below the futures price, which is right in line with previous five-year averages for this timeframe. Eastern Corn Belt terminal bids are from 5 to 20 cents under futures, also in line with seasonal expectations. Texas bids tend to be 5 to 20 cents over futures at this time of year, and sure enough, that's where we find them now in 2015. Even the Dakotas and Minnesota, which experienced some of the worst rail congestion and basis depression during the past two marketing years, are posting much more "normal" bids now, from 50 cents under to $1 under, depending on a buyer's distance from a competitive market.
During the past year, the industry has progressed from panic about shipping capacity to a blithe confidence about handling a normal, abundant crop. How and why were we able to make that change? Within the grain market itself, there are two quick explanations. 1) The relatively low grain prices have prevented U.S. farmers from being very aggressive movers of grain lately. 2) The industry's preparation for storing large grain volumes has notably improved since 2013's congestion. USDA figures suggest overall grain storage capacity has increased by over 1% each year for the last few years.
Without grain shippers feeling crushed to put grain on rail cars, the secondary rail freight market has experienced a phenomenal crash. Last year at this time, the secondary railcar market was paying $4,000 per car above tariff for October grain shuttles. During the first week of October 2015, that freight market was priced at only $347 above tariff, roughly a 90% collapse.
But remember: everything's connected. We could make the case that this year's normal basis prices have more to do with the price of electricity and natural gas than with actual grain marketing patterns. Here's how that line of thought would go:
-- Natural gas prices collapsed in December 2014, and at $2.50 per million British thermal units today, this energy source is 45% cheaper than it was 11 months ago.
-- Electricity generators have taken advantage of this opportunity. This summer, there were months when more U.S. electricity was actually produced from natural gas than from coal, which is increasingly pressured by environmental compliance factors, even when it's price competitive with natural gas.
-- Since the power plants weren't using as much coal, in the first half of 2015, the total railcar loadings of coal fell 10%. Coal is far and away the biggest chunk of rail traffic (35% of total loadings), so the 10% drop is hugely important. It frees up capacity and makes congestion through certain corridors less likely.
-- Meanwhile, other categories of rail shipments also showed fewer loadings in the first half of 2015. Crude oil and fuels were down 14%, farm products were down 6%, and containers were down 4%. That's actually rather concerning when we consider the overall economy and consumer demand for commodities, but in the short term anyway, it helps keep rail freight costs from spiking and prevents one source of pressure on our harvest-time grain basis bids.
The total grain freight picture also includes barge freight (with seasonally normal prices in 2015) and truck freight (diesel fuel prices have remained stable and relatively cheap so far during this harvest season). So of course, the system is too complex to say outright, "Cheap natural gas equals fewer coal cars, which equals uncongested railroads and normal grain basis."
But I think that's the kind of interconnected analysis that Leonardo da Vinci might have appreciated. It certainly makes the commodity markets fascinating; you can never predict from which corner of the world a significant price influence will come.
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.
(BAS/CZ )
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