While the USDA report was bearish, the market closed like it didn’t matter. Corn lost 3 cents and beans gained 7 cents on the week. Typically corn prices don’t increase after the September report through the end of September, but we’ll see.
Early reports from the field suggest yields are questionable and variable. We have 20% of the corn on our farm in Nebraska harvested, and so far it’s yielding 10 to 15% below average. We expected lower yields, though, on these fields because they are on dryland and in July we missed some rains in our area. We expect at least average yields on the rest of our acres since they are irrigated fields are planted with longer season corn. It seems every year the market hears of these lower than expected yields as the harvest starts, but by the end we find that the yields are much better.
Worldwide U.S. corn prices are competitive. This may suggest corn prices are finding some support, as long as the U.S. dollar doesn’t increase against the Brazilian currency or South American farmers decides to sell a lot of corn.
Soybean demand continues to be strong. Globally, U.S. beans are competitive to world prices with futures around $9.50 to $9.70. The major factor impacting prices going forward will be South American farmers sitting on old crop. To maintain these price levels, the U.S. dollar needs to remain steady to the Brazilian currency and South American farmers need to hold off making a lot of sales as they start planting over the next six weeks. Planting conditions throughout South American will also keep some uncertainty in the market. While some areas have been too wet and others too dry, the bean planting window is wide and there shouldn’t be too much concern for at least a couple weeks.
In the U.S., big yields are being estimated for the 2017 harvest. Spreads between contract months suggest the market wants soybeans later and basis is weakening as harvest approaches. Technically beans bounced off the $9.80 level and could continue to trade lower, but it’s hard to say if the bean low for the year has happened. As harvest gets in full swing, it will be difficult being bullish beans until after Oct. 1.
During harvest, I can’t logistically haul soybeans from the field to the processor. We don’t have enough trucks or people to keep the combine moving AND wait in line for three hours to deliver the grain. Instead, we store beans at home during harvest and look for future opportunities to move the beans later. For the 2016 crop, we moved our beans in the last 30 days.
Also during harvest, I usually don’t know exactly when I will move my beans from home storage. If I hold my beans until after harvest, then I need to move my ’17 hedges (currently in Nov futures) to a future month. This year, I moved them to Jan futures. So basically, I bought back my short Nov futures and sold Jan futures for a 10-cent premium.
Many farmers get tripped up in the value of the futures of these two months, but that doesn’t matter. Only the SPREAD value between the months matters. So, if I buy Nov beans and sell Jan beans higher, then I make more money (buy low/sell high). In this example I can make 10 cents for holding my beans for two months (i.e. market carry) in home storage.
Are you going to move your beans right after harvest?
At this point I’m not exactly sure when I will actually move my beans. Last year I held them for 11 months. This year I could hold them for just two months or I might hold them longer. I’m really not sure yet. The reason I choose January was that I could get the most market carry for this trade at 5 cents per month. Every other forward futures month was at slightly less on a per month value.
Why store beans for only 10 cents for two months?
Many farmers think it is a waste of time and energy to store beans for two months for 10 cents. It’s a reasonable question, but in my experience farmers don’t always fully take into consideration all of the hidden costs, especially their time or freight costs. Following are the details and options available near my farm:
• My local shuttle loader (10 miles away) is bidding 40 cents less than a processor 60 miles away. Typical wait time during harvest at the processor is two or three hours not including drive time each way. In this example, I can get an additional 40 cents, but it takes an additional four to five hours of time for each load I haul. While farmers may figure time and mileage costs a bit differently, for me the additional 40 cents isn’t worth the extra hours of time required during harvest. After including labor costs, fuel and the potential of beans drying down in the field during the extended harvest time, the cost is too high compared to hauling to a local shuttle loader.
• After harvest the 40-cent variance between the local shuttle loader and the processor will usually still exist. Using commercial freight, it costs me 25 cents to haul beans to the processor, meaning the processor is still 15 cents better than my local shuttle loader. But I also can collect the added 10 cents of the two-month carry detailed above. Therefore, by storing my beans until after harvest I can make a 25-cent premium. That 25 cents is nearly the cost of my bin payment and justifies why I recommend that farmers store all of the bushels they raise. After seven years of doing this, I’ve paid off my bins, an asset which should last another 30 years, and now this 25 cents is pure profit for me in the future.
What about basis?
This example assumes there is no change in basis from harvest to a couple months post-harvest. In most years there has been a premium in holding and waiting for a basis increase (last year was an exception where there was zero increase).
As always, it’s important to remember that farmers can only get carry premiums IF they have their crop already priced with futures. Farmers who don’t plan ahead miss out on this guaranteed opportunity AND they have to take on far riskier opportunities (like hoping the market goes up after harvest) to make additional income.
Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
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