Mississippi levels, high basis prices upend CIF Gulf-FOB Gulf relationship
A combination of price-sensitive destination markets and ongoing domestic logistic challenges could threaten to further disrupt US corn exports as current prices at the primary US Gulf export hub make it less profitable for exporters to bring corn to the global market.
Key is an inversion between US Gulf CIF barge values - the primary transport method for delivering corn from the fields of the Midwest to the Gulf ports - and the FOB cargo market, the main method of international exports.
While Mississippi River water levels are no longer at the multi-decade lows seen last autumn, corn barge traffic on the waterway is still vulnerable, which along with high basis prices has resulted in higher premiums for front-month CIF Gulf barges than for FOB cargoes along the Gulf Coast.
While winter precipitation has led to a return to normal traffic on the river, warnings of a reduction in drafts in St Louis last week helped explain the most recent move of the CIF barge premium over that for FOB Gulf.
"I think it is mostly a logistical issue with drafts in the St Louis area expected to drop from about 12 feet to less than 10 feet, making it more difficult to get an adequate supply of corn barges to the Gulf and hence, the premium to the FOB market," Larry Shonkwiler at Advance Trading told Agricensus.
The CIF US Gulf barge premium to CME corn futures is normally lower than that for FOB US Gulf, allowing for the profitable movement of grain from growing regions in the middle of the country to ports in Louisiana, where it is transferred to large ships for the journey to customers in Asia, Latin America and elsewhere.
Transportation issues are upsetting this relationship, so the front-month CIF US Gulf barge premium stood at a 91c/bu premium to the March CME corn contract last week, far exceeding the FOB US Gulf premium of 83c/bu.
"CIF barge is usually a discount, so this is unusual," senior grain and oilseed commodity analyst at Futures International Terry Reilly told Agricensus.
During the past year, the average CIF US barge premium stood at $1.10/bu, well below the FOB Gulf premium of $1.26/bu.
FOB is at a discount to CIF "due to the low water levels on the Mississippi River all summer. This has no doubt hurt US export business out of the Gulf and will continue to until water levels are restored,” Brain Hoops, president at Midwest Market Solutions, told Agricensus.
And, while the CIF premium to FOB would appear to make it unprofitable to export corn from the central US, it's not necessarily the case, Jay O’Neil, owner of HJ O’Neil Commodity Consulting, said in an interview.
“You must keep in mind that many February barges will be feeding March cargoes, there’s often a ten-day to a two-week logistical lag time between barge shipments and vessel loadings. For example, from the Illinois River to New Orleans there’s a 10-14-day transit time to the ports in New Orleans,” O'Neil said.
"Depending on a facilities vessel loading schedule, you can still eke out a small margin in late February-early March,” O'Neil added.
The war between Russia and Ukraine and the low water levels in the Mississippi combined to make CME corn futures incredibly volatile over the past year, with the front-month contract surging to a nine-year high of over $8/bu in April before plunging to under $6/bu in July.
"Historically high volatility in commodity markets has made farmers more cautious and constantly waiting for the next big rally," O'Neil said
This volatility has led some farmers to hold back on supplies as they wait for the next peak, driving basis prices higher, irrespective of what's happening to futures in Chicago.
"Corn basis is near 20-year highs across the country... We’ve seen farmers watching the market go up and down, and they seem to always miss the highs," Reilly said.
"When the commodity futures contract price is not encouraging sufficient farmer selling, the basis price must do the heavy lifting. The basis price always works to keep the grain flow regulated at the needed level,” according to O'Neil.
The decisions made by US farmers to hold out for higher prices combined with low water in the Mississippi last year, limited rail capacity, and greater competition from Brazil, have led to lower US corn exports.
Accumulated corn exports for the 2022/23 marketing year now total 12.61 million mt – down 36% from 19.57 million mt recorded at the same point in 2022 - and a lack of cheap corn supply means the FOB basis price is having to work hard to ensure any trade at all.
"It would seem difficult to find enough cheap origin bushels that will suddenly price us into being massively competitive in the current export picture," Kelly Herrick of Advance Trading said in an interview with Agricensus.
"I think we're relegated to watching if South America has production issues or if Chinese demand changes the narrative on the forward export picture," he continued.