US corn basis firm on strong ethanol margins even as harvest wraps up

The corn basis in key US markets was firm in the month through Nov. 22, even as the current marketing year 2021-22 (September-August) harvest is coming to a close, because of strong ethanol production over the recent weeks and farmers' reluctance to sell.

The basis is calculated by finding the difference between the spot and futures prices of a commodity. A narrowing negative basis range and a widening positive range typically indicates strong demand or supply shortage or a combination of both.

The average corn basis in the state of Iowa, the largest producer of corn in the US, was 19.87 cents/bushel under the Chicago Board of Trade's December corn contract for the current month as of Nov. 22, with the five-year average for November at 33 cents/bu under the CBOT futures contract, data from the Iowa Department of Agriculture and Land Stewardship showed.

"The two factors that are controlling corn basis are very high ethanol margins and farmers not selling," Pete Meyer, head of grains and oilseed analytics at S&P Global Platts Analytics said. "They will not sell now until January for the most part just because of tax implications for 2021."

Farmers will wait until January to make their sales to avoid taxes in 2021, Meyer said. The leading factor for the current strength in corn prices was, however, high ethanol margins.

Ethanol races ahead

Corn is the primary feedstock for ethanol in the US and nearly 40% of the country's corn output is consumed by the ethanol industry. Ethanol is usually blended with petroleum fuels but can also be used on its own.

Ethanol production in the US was over one million barrels for the sixth straight week to Nov. 12, according to the latest data released by the US Energy Information Administration.

Prior to the COVID-19 outbreak in 2019, US weekly ethanol production was at or above one million barrels for 43 out of 52 weeks. Weekly ethanol production in 2021 was at or above one million barrels for just 18 weeks out of 46 weeks through Nov. 12.

"October was a banner month for US ethanol producers, dominated by sky-high ethanol prices, extraordinary manufacturing margins, and near-record output," Platts Biofuels Analytics Global Manager Corey Lavinsky said. "Chicago ethanol prices soared above $3/gal for the first time since April 2014, closing at $3.08/gal on Oct. 28."

Unseasonably high driving demand, despite the end of summer driving season, and a robust export program have supported ethanol prices, Platts reported earlier this month.

"US ethanol production rose from 2020 to 2021 and will increase again in 2022," Lavinsky said. Ethanol prices and manufacturing margins will subside as inventories build, which is typical at the end of the year, he said.

Ethanol producers are also waiting for COVID-19 relief payments promised by the US Department of Agriculture heading into the new year that should boost the industry.

"Nearly all ethanol in the US is made from corn so the recent surge in ethanol production is an exciting development for corn growers," said Lavinsky.

The USDA in its most recent World Agricultural Supply and Demand Estimates report increased its estimate of corn use for ethanol and its by-products in the MY 2021-22 season to 5.25 billion bushels, from 5.2 billion bushels.

ADM's end-October announcement that it entered into an agreement with Gevo to supply 900 million gallons of ethanol annually for conversion into sustainable aviation fuel starting 2025 provided a 'feel good' factor and contributed to corn's price strength, Platts Analytics said in its November Global Biofuels and Agriculture Outlook.

The prices also had some deferred strength from September, when fertilizer prices for fall and spring were in focus, according to the outlook. Unusually high fertilizer prices provided sentimental support to corn prices amid rising concerns about price and availability of fertilizers, as US farmers start spring plantings.

Corn being a fertilizer-intensive crop offers lower returns currently, compared with soybeans, as fertilizer prices soar to near-record highs.

A 3 million acre shift away from corn to soybeans is possible in the US, with both corn and soybean acreage at around 90 million acres in MY 2022-23, according to Platts Analytics.