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| Lets look at it from a end user standpoint. A good merchandiser cares way more about buying corn at a cheap basis then cheap futures. If they want to speculate prices they can just buy it on the board.
As end user if I thought there was plenty of corn supply and the futures would rally, likely that would leave a chance to buy corn at some pretty wide basis levels. Did you see what happened to cash bids on our last 4th of July rally? Spot basis here went from at the option to 40 to 45 under in a matter of 3 to 4 weeks. Now if I was looking to buy corn after harvest and was concerned futures price would crash lets say sub $3 futures prices, what would basis have to do to get shook out of the farmers hands, would 10 to 20 over even do it? Farmers will just want to hold till higher prices.
So lets say they are buying corn for $3.40 cash, a good bid today. July 16 corn is trading at $3.90 at the moment. So as they are buying $3.40 corn today they are selling $3.90 futures locking it in 50 under basis for July. Now lets say July rolls around corn is trading at that $3.00 futures, farmers don't want to sell for less then $3 instead of being forced to bump basis, they can just go "We got this pile of corn in our back yard locked in for 50 under, we can pull our hedges off that for $2.50 cash price today. If farmers don't want to sell for that, we will just pull off the pile" This example is a little extreme, but it goes to show how a good end user will take advantage of carry.
Edited by MRK 9/7/2015 23:10
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Corn piles?
