The Ambiguous Relationship between Grain Stocks and HRW Basis in Kansas
The USDA’s March 1 grain stocks was a bearish report for the three major exchange-traded commodities — corn soybeans and wheat — as all three commodities showed larger than analyst estimated inventories. However, the estimated stock levels in the midwest states become an area of particular interest. In Kansas, the reported March 1 commercial, off-farm stocks of corn, sorghum, soybeans and wheat were the largest on record. Combine these stocks levels with the 2019/20 HRW crop where production is widely expected to be at least 800 MBU, and the probability exists that local basis could come under pressure during wheat harvest.
Total Stocks and Space
The March 1 USDA report stated commercial total grain stocks in Kansas was 816 MBU and a record for the time period. Supported by growing record volumes of corn, sorghum and wheat amid lackluster export programs and the current carry structure in wheat which incentivizes storage, the total March 1 consumed commercial space in Kansas is at 53% is also a record for the time period. While the wheat carry structure has provided the commercial storage operator with a physical “put” against declining futures prices, the growing probability of above trend yields of local Kansas HRW production can represent a cautionary signal for local wheat basis.
HRW 2019/20 Wheat Production Development
Given the continuous contraction of aggregate planted HRW acres that has left acres at multigenerational lows, favorable weather and other advances in seed technology have helped production outpace the drop in acres. The most recent crop condition scores for HRW illustrate that the recent rains in Kansas, Nebraska, Oklahoma and Colorado have benefitted and propelled many crop ratings to the top of the historical range and above the five-year average.
One result of the March and early April precipitation is that early yield and production estimates have the HRW crop over-performing. The national production estimates range from 780-820 MBU. Using a higher-than-above-trend yield of 48 BPA and assuming an abandonment rate of 6.5% that is slightly higher to accommodate for early season wetness and the switch to row crops, the estimated Kansas 2019/20 HRW wheat production is 314 MBU, + 36.7 MBU YoY. While the estimated production number is subject to interpretations on yield and thoughts about abandonment rate, the early crop condition scores combined with the May-June forecast that predicts above-trend precipitation and below-average temperatures for the region seems to help suggest that any rise in abandonment and decline in acres planted could be mitigated by a rise in yields.
Local HRW Basis Behavior
Local HRW spot basis in Hutchinson, Salina, Garden City and Colby all express some type of seasonal tendencies. While well-known, the spot basis in the aforementioned locations over a 10-year period experience an appreciation into June and decline from July into August and then start to show seasonal strength into the late fall and winter. Reasons for the strength and weakness around the June/July-August time period are attributed to harvest, with the cash market strength returning after the conclusion of the harvest, including corn and sorghum.
Estimating that the June 1 stocks decline to 545 MBU, or consuming 36% of total commercial space, using the Kansas production estimates of 314 MU and assuming that 75% of the crop, 235 MBU, enters registered USDA commercial elevators, space consumed would be approximately 58% and at the upper-end of the 20-year history, but not enough to pressure local basis. Looking at the 10- and 20-year relationship between the June 1 stocks, + 75% of the HRW harvest goes into storage and the Salina and Hutchinson basis shows a moderate correlation exists but it’s difficult to determine if growing stocks or declining space causes a decline in local basis. We primarily rely on the FBN cash market data from the Salina location because of the lengthy, 20-year history. FBN cash market data for Hutchinson offers a 10-year history.
Looking at the relationship between local spot basis and registered Kansas commercial stock levels presents a difficult yet statistically moderate conclusion. Meaning, as space contracts during harvest, a correlation between space and basis exists. However, trying to predict basis using space has proven difficult. The spot HRW basis at four locations – Hutchinson, Salina, Colby and Garden City – all show seasonal tendencies that exhibit strength into the period before harvest, weakness during the peak harvest, followed by late-year strength. Given that the basis in all locations displays such strong seasonal tendencies, it’s difficult to both attribute and predict basis performance on changes in either absolute commercial stock levels and percentage of space consumed.
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