By Jon Scheve, Superior Feed Ingredients, LLC
The upcoming corn and soybean harvest is expected to generate the largest crop ever. Combine that with one of the largest carryouts ever and it’s panicking both farmers and end-users without enough storage. As a result, basis levels are at mid-harvest levels before we even begin, suggesting end-users are overwhelmed with grain arriving on their doorstep as farmers clear out space to make room for the crop that will be arriving in a few weeks. The market is paying to store any part of this crop for a while, which may spur some creative storage solutions.
On a positive note, corn futures seemed to bounce off the bottom by 10 cents this week, which may suggest this year’s corn low has arrived. If this turns out to be the case it would be the third year in a row for that to have happened at the end of August.
However, last year harvest was slow and as a result the market was able to consume quite a bit of the excess grain. This helped keep prices from dropping and basis from being even lower. This year the harvest looks like it could be early which is putting added pressure on the logistics for the entire grain complex, which is already overloaded. Prices could still find their way heading lower as harvest begins.
Any beans futures rally seems like a gift at this point. Basis levels are lower than last year’s harvest. In the Dakotas for example, some cash value bids are in the $6s. Cash beans don’t really have an export home because of the trade issues with the world’s largest bean buyer. Beans seem to have more downside risk than upside potential for the next 45 days. Plus, recent comments from the White House suggest relations with China are far from being fixed. Without a trade resolution, bean prices may find it difficult to rally until after harvest.
What I’m doing with my remaining ’17 corn?
I priced my remaining ’17 corn with futures by exercising some $3.60 Sep puts. That corn is physically stored in my bins and I fully intend to hold it until after the ’18 crop is harvested. These bushels represent about 35% of my ’17 crop and I have plenty of on-farm space to store this corn and all of my 2018 crop.
I’m choosing to make this marketing decision because the basis is already at the lowest level I have seen in two years. However, because my futures sales are against the Sep futures which are now in the delivery process, I had to move them forward to another futures contract. Thus, I had to “roll” my futures positions forward to capture carry and look for a better basis opportunity down the road.
What does “rolling” my futures position forward mean?
Rolling futures is also the process by which I collect market carry. I had an options position that turned into a short Sep futures position or a sale. This means that I have to deliver my grain immediately, unless I moved this sale forward. So, I bought back those Sep futures and immediately sold Dec futures, which were trading 15 cents higher than the Sep futures on 8/30/18. This meant I collected an additional 15 cents that can be added to the value of my corn.
Note, the value of the Sep and Dec futures at the time of the trade don’t matter, only the spread value between the two futures contracts matters (i.e. the 15 cents). That spread value is the profit of the market carry.
Why not just sell the corn for cash?
Mathematically it’s a lot more profitable to store the grain longer, since I have enough on-farm storage. The following illustrates why.
Price and profit if I sold corn for cash now
- Friday’s Closing Futures Value: $3.52
- Basis Value Today Near My Farm: -$.43
- Cash Value I Would Receive: $3.09
- Farm Operating Note Interest: 5.5%
If I take the 5.5% interest rate on the $3.09 cash corn value, which is my cost to not physically move, sell and collect a check on the corn in the bin and pay down my operating loan, the corn costs me 1.4 cents/month to continue to hold it in storage. (The math I used: $3.09 x 5.5% = 17 cents for a year / 12 months = 1.4 cents per month)
Price and profit if I sold corn in Dec
- Market carry profit (detailed in trade above): 15 cents profit
- Basis value in December (if locked in today) near my farm: -$.18 (25 cents more than today)
- Operating note Interest (3 months): -4 cents
Total profit for holding my corn until December, if I locked the basis in today would be a guaranteed 36 cents per bushel better price.
If I raised the national average yield of 177 bushels per acre last year I could guarantee myself more than $63 per acre of additional income.
I had the opportunity to set the basis at -.21 the Sep instead of the -.43 the Dec that is posted today. However if we apply the value of the spread at 15 cents to the Sep basis we find that -.21 the Sep is/was actually -.36 the Dec. So really all I have seen is a drop in basis of 7 cents from the best value this summer. Either way, it’s remained a better decision to hold the grain until after harvest.
Why didn’t you lock in the basis today?
I didn’t lock the basis in today because I might want to hold the corn until March pending what the basis levels and the market carry show in the futures. There could be even more opportunity down the road but I will want to see how the corn looks in the bin after harvest as well. I have some risk the basis might not be as strong in the future, but there is a carry in the futures market until summer so I think I’m ok in waiting.
I have grain quality risks, but I have been practicing the past couple years on holding small amounts of grain and I think I have figured out how to mitigate this risk in my bins.
The market tells me what to do
With the large carry and huge basis improvement until after harvest the market is begging someone to store grain. That’s why I’ve been building bins on my farm the past couple of years and experimenting with longer term storage. This is not the first time that the market has wanted someone to store corn until well after harvest. Values almost this good have been present the last several years in the corn market.
I can take advantage of these opportunities to get more profit on my corn. This is especially needed when the market remains unprofitable for long periods of time, like it has the past 18 months. This is just another example of why considering alternative solutions to increase profits and being prepared to take advantage of opportunities can help farmers during tough market times.
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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