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In 2018 Nebraska farmers planted 9.7 million acres of corn, the most of any crop in the state. The primary uses for corn in the state are cattle feed and ethanol production. Nebraska currently has 25 ethanol plants producing around 2 billion gallons of ethanol annually. This capacity consumes approximately 40 percent of Nebraska’s annual corn production.

Ethanol became widely produced in the state after the introduction of the Renewable Fuels Standard (RFS) in 2005, which mandates that a percentage of renewable fuels, mainly ethanol, be blended into transportation fuels. This article explores the changes in corn basis since the implementation of the RFS for five locations across Nebraska.

Changes in basis are important to Nebraska corn farmers’ financial wellbeing. Changes in the average basis value directly impact the farmer’s bottom line. The more negative the average basis value is, the less revenue the farmer is receiving. Furthermore, more volatile basis values result in greater basis risk.

Data

Basis is the difference between the cash price and the futures price. Basis is essentially the fee that grain buyers charge farmers for handling their grain. Many factors influence basis values, including the local supply and demand, transportation costs, quality of the grain, and the cost of doing business. The basis values used for this analysis were calculated using the United States Department of Agriculture’s Agricultural Marketing Service (USDA AMS) Cash Grain Bids report for Nebraska ( WH_GR111). Reports were collected Thursday of each week. Locations shown in this discussion must have had cash prices consistently reported since 1993, and are no closer than 50 miles from one another. The locations that have met these criteria are Beatrice, Greenwood, Grand Island, Lexington and Superior as shown in Figure 1. To obtain the basis, the cash price for each location was subtracted from the closing price of the nearby futures contract for that day. If there were missing observations, these values were interpolated using a simple average of the previous and subsequent basis values around the gap.

Map showing basis reporting locations and ethanol plants
Figure 1. Nebraska Ethanol Facilities and Reported Basis Locations

Analysis

Two periods of basis values were selected for comparison: (1) February 25, 1993 to August 4, 2005 and (2) August 11, 2005 to December 28, 2017. These two periods are divided by the RFS mandate, which was implemented August 8, 2005. Many changes to the corn market occurred during the span of these data. This analysis does not separate factors such as the increase in acreage, genetic advancements, or additional uses for corn that have influenced its demand or supply since 1993. Thus, the analysis will focus on the long-term adjustments in basis values rather than pinpointing the specific causes of these changes.

The summary statistics and coefficient of variation are reported for each location and period in Table 1. The summary statistics show that in all five locations, the average basis value was $0.05 to $0.09 per bushel lower from August 11, 2005 to December 28, 2017 than it was from February 25, 1993 to August 4, 2005.

Table 1: Summary Statistics: Basis for Selected Nebraska Cities
FEBRUARY 25, 1993 TO AUGUST 4, 2005 AUGUST 11, 2005 TO DECEMBER 28, 2017
Obs. Avg. Std. Dev. Min. Max Coef. Var. % Obs. Avg. Std. Dev. Min. Max Coef. Var. %
BEATRICE 650 -0.21 0.207 -0.94 1.34 98 645 -0.3 0.236 -0.68 1.5 80
GRAND ISLAND 650 -0.18 0.163 -0.5 1.09 90 645 -0.26 0.234 -0.73 1.5 91
GREENWOOD 650 -0.24 0.175 -0.6 1.29 73 645 -0.33 0.241 -0.75 1.45 74
LEXINGTON 650 -0.15 0.184 -0.53 1.59 119 645 -0.21 0.269 -0.71 1.76 130
SUPERIOR 650 -0.16 0.175 -0.58 1.2 113 645 -0.21 0.229 -0.58 1.6 107

This lower average basis value indicates that farmers have experienced a larger discount from the futures market price after the implementation of the RFS. This may seem counter-intuitive to farmers, as an increased demand brought about by the expansion of ethanol production would strengthen the corn basis or make it less negative. However, a recent study of North Dakota corn basis values by Fausti et al. (2017) would suggest that the increased corn production during the latter period of this study would outweigh the demand created by increased ethanol production.

The second portion of this analysis measures the differences in basis volatility between the two periods. There are two specific measures of volatility that can be discussed from the summary statistics. The first measure of volatility is the standard deviation (Std. Dev). Normally, the higher the standard deviation, the greater the basis volatility. All five locations experienced standard deviations from $0.03 to $0.08 per bushel larger in the second period. This means that the normal range of basis values for each location would be the average basis ± the standard deviation. For example, the normal basis range for Beatrice before RFS would have been $0.00 to -$0.44 per bushel. After the RFS, the normal basis range for Beatrice is -$0.06 to -$0.54 per bushel.

The second measure of volatility is the coefficient of variation (Coef. Var.). It is a measure of relative volatility and is expressed as a percentage. To calculate coefficient of variation, divide the standard deviation by the mean. The higher the coefficient of variation, the greater the price volatility. The coefficient of variation does not have a consistent result across all five locations. The coefficient of variation was smaller for Beatrice and Superior but was almost equal in Grand Island and Greenwood, and was much larger in Lexington.

Research by McNew and Griffith (2005) found that the farther one is from an ethanol facility, the lower the impact that facility will have on the price. This may hold true for the reported locations in this analysis. The two reported locations where the coefficient of variation improved, Beatrice and Superior, had the fewest number of ethanol facilities in a 50-mile radius. Grand Island and Greenwood experienced a slight increase in volatility. Grand Island has nine facilities with a 280 million bushel crush capacity in a 50-mile radius, and Greenwood has three facilities with a 114 million bushel crush capacity. Lexington has three plants in a 50-mile radius, one of which is located in Lexington itself.

This analysis shows that basis values have changed between the two periods of this study. Structural changes in the market have decreased the average basis value at the reported locations $0.03 to $0.08 per bushel. Basis has also become more volatile, but the amount of variability depends on the relative distance of reported location to an ethanol facility. Overall, these results indicate that farmers who are close to an ethanol facility have greater basis risk.

Increases in basis volatility can influence the effectiveness of a farmer’s hedging strategy. Imagine a corn farmer who takes a short position in the futures market during the growing season for grain he or she plans to deliver at harvest. When farmers place a hedge in the futures market, they do so assuming a specific basis value for harvest. The hedge locks in the futures prices, but leaves the farmer vulnerable to changes in the basis value. This vulnerability is referred to as “basis risk.” The larger the volatility measure is, the more basis risk a farmer has. However, greater volatility does not always imply a more negative outcome for the farmer. The basis at harvest could be stronger (less negative) than the basis value they had assumed when they placed the hedge. This stronger basis would result in a higher net price received. Farmers need to adjust their hedging strategies to account for lower average basis values, and a wider range of basis possibilities in order to account for the structural changes that have taken place in the corn market.

Lincoln, Neb. — Decades after scientists discovered hundreds of different fatty acids in vegetable oils, two that had managed to elude detection have finally revealed themselves to a team led by the University of Nebraska-Lincoln and Huazhong Agricultural University in China.

Named for the sites of the two leading institutions, Nebraskanic acid and Wuhanic acid make up nearly half of the seed oil found in the Chinese violet cress, a flowering plant native to central China.

According to the research team, the discovery may be the first of its kind since the 1960s and 1970s, when biochemists identified troves of new fatty acids in various vegetable oils.

“People thought maybe they’d found everything there was to find,” said Nebraska’s Ed Cahoon, a George Holmes University Professor of biochemistry who co-authored an Aug. 27 study on the discovery in the journal Nature Plants. “It’s been at least several decades since somebody has discovered a new component of vegetable oil like this.”

Fatty acids represent the primary components of vegetable oils, which are best known for their role in the kitchen but have also found use in biodiesel fuels, lubricants and other industrial applications. The structure of the fatty acids housed within an oil help dictate both its health effects and industrial merits.

Most off-the-shelf vegetable oils, such as canola or soybean oil, contain the same five fatty acids. Those conventional fatty acids all contain either 16 or 18 carbon atoms and feature similar molecular structures. By contrast, Nebraskanic and Wuhanic rank among a class of “unusual” fatty acids that contain fewer or more carbon atoms — both have 24 — and uncommon molecular branches that stem from those carbons.

Whether conventional or unusual, all known fatty acids generally obey the same instruction manual: They add two carbon atoms at the end of a four-step biochemical cycle, then continue doing so until assembly is complete. But the Nebraskanic and Wuhanic acids seem to go off-book, Cahoon said, in a way rarely if ever seen outside of certain bacteria.

Both acids appear to follow the traditional script until adding their 10th pair of carbon atoms, Cahoon said. After reaching that milestone, though, the acids appear to skip the last two steps of the four-step cycle, twice cutting short the routine to accelerate the addition of the 11th and 12th carbon pairs. The process also leaves behind an oxygen-hydrogen branch, or hydroxyl group, in the fatty acid chain.

“We sort of had an idea of what the biochemical pathway might be, but it was completely different than what’s in the biochemistry textbooks,” Cahoon said. “These fatty acids also seem to be stored in the violet cress seeds in a way that we haven’t quite seen before for other vegetable oils.

“We believe that the fatty acids are linked to one another through the hydroxyl groups to form a complex matrix of fatty acids, which is quite different from how fatty acids are arranged in a typical vegetable oil.”

That unique assembly and structure could account for the corresponding oil’s superior performance as a lubricant, which was tested at the University of North Texas. Compared with castor oil, the violet cress oil reduced friction between steel surfaces by 20 percent at 77 degrees Fahrenheit and by about 300 percent at 212 degrees Fahrenheit.

“When we saw the long-chain molecules and their arrangement, we knew the oil found in Chinese violet cress seeds would make an excellent lubricant,” said Diana Berman, assistant professor of materials science and engineering at North Texas. “This oil doesn’t just have the potential to supplement or replace petroleum-based oil; it can also replace synthetics. It is a renewable solution to a limited-resource problem.”

Cahoon said the team intends to further investigate how enzymes drive assembly of the fatty acids. Better understanding their architecture could also yield practical benefits, he said.

“We think that if we can figure out exactly how all these fatty acids are connected to one another, then we can maybe design ways to make better lubricants,” Cahoon said. “Nature can guide us.”

Fatty chance

The “serendipitous” discovery of Nebraskanic and Wuhanic acid began in China, where Chunyu Zhang and his colleagues at Huazhong Agricultural University noticed a strange reading in a chemical analysis of the violet cress oil.

Zhang’s team was using an analytical technique known as thin-layer chromatography. The technique involves depositing a sample of liquid onto a plate, then adding a solvent and forcing the resulting solution up the plate via capillary action – a physical force that allows liquids to move against gravity in confined spaces. Different components of the solution climb the plate at different speeds, creating distinct bands that offer insights into the original sample’s chemical makeup.

To Zhang’s surprise, one of those bands seemed to have abandoned its typical perch higher up the plate for a spot farther down when the oil was deposited on a certain material. Zhang decided to consult his colleague Cahoon for a second opinion.

“He’s showing me a scan of this chromatography plate and this band,” Cahoon said. “I’d never seen anything like it. He gave me some seeds and said, ‘Let’s figure out what this is.’ That’s how the whole project started. It was very much a fluke that this was even found.”

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Scott Schrage | University Communication
(Click to zoom)

After late nights spent confirming the anomaly and tracing its origins, the researchers tapped the expertise of Robert Minto and Alicen Teitgen at Indiana University-Purdue University Indianapolis, who spent a year helping to characterize the structures of the two fatty acids.

The team also managed to pinpoint two genes that, when activated, help kick-start production of the fatty acids. That knowledge could inform efforts to ramp up production of the oil, and its performance-enhancing fatty acids, to an industrial scale.

“With breeding and bringing in other germplasm, maybe we can make this plant into an industrial oilseed crop,” Cahoon said. “Right now, the yield is less than half that of canola, but canola’s been intensively bred for more than 50 years. It’s a great crop already.”

The researchers authored the Nature Plants study with Juan Ling, Wei Zhang and Zaiyun Li of Huazhong Agricultural University; senior research associate Xiangjun Li and postdoctoral researcher Lucas Busta, both of Nebraska’s Center for Plant Science Innovation; Rebecca Cahoon, research manager in biochemistry at Nebraska; along with Asghar Shirani and Kent Chapman from the University of North Texas.

The researchers received support from the U.S. National Science Foundation and the National Science Foundation of China.

Lincoln, Nebraska,  – Ikuo Kabashima, University of Nebraska–Lincoln alumnus and governor of Japan’s Kumamoto Prefecture, will speak Sept. 7 at a forum of the university’s Clayton Yeutter Institute of International Trade and Finance. He will address the impact of a changing trade environment on prefectures and states.

The keynote address will be at 1:30 p.m. in the Nebraska East Union. The event is free and open to the public.

Kabashima will discuss his efforts to promote international trade in Kumamoto Prefecture. He will also speak about his response to the earthquakes in Kumamoto in 2016 and describe how he drew upon his experiences in the United States, especially in Nebraska, to implement smart-agriculture systems and measures against bird flu. Following his remarks, he will participate in a panel discussion with Ralph Inforzato, chief executive director of the Japan External Trade Organization, on trade, investment and agriculture.

Japan is Nebraska’s fourth-largest international trading partner and the world’s No. 1 importer of Nebraska beef, pork and eggs.

Kabashima has been governor of Kumamoto Prefecture since 2008. As governor, he led the development of Kumamon, a promotional mascot that has driven product sales and gained popularity in Japan and beyond. Prior to his political career, he was a professor of law at the University of Tokyo. He holds a bachelor’s degree in animal science and a master’s degree in agricultural economics from Nebraska, along with a doctorate in political economy and government from Harvard University.

“Gov. Kabashima’s leadership of Kumamoto Prefecture in the areas of agriculture and export promotion, among others, provides an excellent foundation for dialogue about agriculture and trade with one of Nebraska’s key trading partners,” said Yeutter Institute Director Jill O’Donnell. “We look forward to welcoming students, faculty and members of the public to this event.”