When Cargill's wet milling plant gets under way, it will create an additional 150,000 bushel daily demand for local corn yet another market where seven other processors are bidding for the commodity.
The demand is high enough that Kelvin Leibold, an Iowa State University Extension farm management specialist, based in Iowa Falls, likens the region as a continent of corn demand.
Picturing each ethanol plant and feed mill as an island for buying grain, Leibold said when they congregate in the numbers that Webster County is seeing, they become a grain-buying continent. Previous continent developments were formed around Eddyville and Cedar Rapids, both with a substantial Cargill presence.
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The shortness of 2012’s crop has kept the futures prices high and the local cash price higher, despite domestic and export demand falling off. Farm managers said so much $7 and $8 corn was sold off the combine last fall in North Central Iowa, that there is little corn not under contract available for end-users, who are bidding well over March future prices to entice producers to sell what’s in storage.
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When Cargill begins competing for local corn in Fort Dodge, it will be yet another end-user in the Webster County area, which is expected to keep local cash bids close to future market prices, especially is the region fails to harvest a trend line yield in 2013, keeping local supply tight.
"When we see a continent around Fort Dodge," Leibold said, "we'll see an impact on the basis."
Basis is the difference between the futures price and the local cash price. For example, if the May futures contract is trading at $2.96 and the cash price is $2.63, the cash price is 33 cents under May, or minus-33 cents.
More specifically, basis is the difference between the current local cash price and the futures price of the contract with the closest delivery month. For example, corn basis in February is usually defined as the difference between the current cash price and the current March futures price.
According to ISU's Ag Decision Maker website the five-year average for corn basis in North Central Iowa - from 2007 to 2011 - during the first week of February is minus-33 cents. That average was derived from a maximum of minus-39 cents and a minimum of minus-21 cents.
To show the current impact of seven corn buyers locally, Valero's ethanol plant in Fort Dodge was, at midday on Feb. 13, bidding corn at $7.17 per bushel, 20 cents more than the March futures price.
At the same time, NEW Cooperative, in Otho, was bidding $7.07 per bushel for corn, 9 cents more than March futures.
Compared to the average minus-30 cent basis for the first week of February, to plus-20 on Feb. 13, this is a 50-cent swing.
And that's before Cargill jumps into the fray to buy an estimated 52 million bushels annually. Al Viaene, plant manager for the Fort Dodge facility, said the company will source corn from a 90-mile radius buying from producers and suppliers alike.
Cargill is scheduled to start up operations in September, Viaene said, and will gradually ramp up production to full capacity over the next few months.
"We'll be competitive in the marketplace," Viaene said. He said Cargill will offer a portfolio of risk management solutions for producers.
"Anytime you get another market it's going to have to help the basis," said Keith Dencklau, vice chairman of the Webster County Supervisors and a farmer. "The volume they (Cargill) will use will have an impact."
Fifteen years ago, he said, there was only one market and the basis was minus-40 cents, he said, because there were far fewer corn processors in the area.
End-users bidding for corn in the Webster City region include ethanol plants Valero, POET in Gowrie, POET in Jewell, Corn LP in Goldfield, Cargill (in 2013), plus NEW Cooperative in several locations and area egg farms.
Dencklau said it wasn't too long ago that farmers were limited to the distance they could take grain, usually by grain cart behind a tractor.
"But today, everyone has a semi," he said. "So if I can get an extra 10 cents," the semi makes the longer haul workable.
Dencklau described the current plus-basis in Webster County and five surrounding counties, as "a weather basis."
He said 2012's drought whittled the overall yield, cutting the supply, while demand remained high.
"Many farmers sold their corn straight out of the field for more than $7 and $8 per bushel," Dencklau said. It was corn that never made it into on-farm or off-farm storage.
He said the basis is partly caused by a low supply, plus there's corn still being held off the market.
"Some farmers sold enough out of the field to pay their bills," Dencklau said, "and then put the rest in storage.
"And it's hard to get it away from farmers once it's in storage and they don't have to sell it."
But even if the Webster County area has decent yields in 2013, Dencklau thinks Cargill's bidding on corn will have a positive impact on local corn basis.
"It's a better basis here now than (selling it down) the Mississippi."
Importing corn soon?
According to Leibold, the addition of Cargill's demand for 150,000 bushels daily will equate to 25 percent of the average total of the counties of Webster (41 million bushels), Hamilton (37 mb) Calhoun (33 mb), Pocahontas (33 mb), Boone (30 mb) and Humboldt (26 mb).
With seven entities already looking to source corn locally, including four other ethanol plants, Leibold can foresee the Webster County region importing corn from outside the area, as long as the plants and feed mills can keep running.
The problem, he said, is that grain may become too expensive for some plants to operate profitably, especially if 2013 sees a continued drought and lowered yields as in 2012.
Another impact may be mothballing biodiesel plants and soybean crushing plants.
Leibold said as the biofuels industry has improved corn basis, Iowa farmers, as a whole, have shifted from their traditional 50-50 rotation of acres between corn and soybeans, to 60-40 corn over beans.
If basis continues to improve and more soybean acres are lost to continuous corn, he said, soybean basis will be pulled up in corn's wake, but the lost soybean bushels could result in bean processors shutting down.
He said businesses will continue to run as long as they can, but if they see they'll lose less money by closing than by operating, they'll shut down, even if it's temporary.
Eye on revenue, not basis
Mark Wolter, a grain merchandizer for NEW Cooperative, in Fort Dodge, which is a supplier of grain for ethanol plants, recommended farmers watch their revenue per acre, rather than basis levels.
The current plus-basis is a weather-related phenomenon, as well as a shortage of corn in the region.
"Last year," Wolter said, "a lot of corn was sold right off the combine, because the price was high at harvest."
He said those buyers have burned through that corn and now looking for more. "The numbers indicate the corn isn't out there," he said.
Even so, he advised caution for the future. "We're only one good harvest away from $4 or lower corn."
World demand for U.S. corn is down, as well, as domestic demand has fallen off due to rationing from high prices. Even though the price remains high, that can change quickly, Wolter said.
Producers should keep their eye on the price as revenue per acre, Wolter said, "the basis will take care of itself.
"They shouldn't get hung up on the basis so they don't sell it at a good price."