Basis, market carry and futures

The weather in Minneapolis this week continues to be cool and wet. Maple trees are already starting to show fall colors, not unusual for this time of year, but certainly a sign that harvest is approaching.

The USDA report showed yields higher than trader expectations, but there are still two weeks of weather that can have a big impact. Realistically, beans could easily trade to $8 or rally to $11. Bulls say the growth in demand for high protein crops (beans especially) have a very promising future. Bears say at some point stock piles need to be moved and processed. It’s still uncertain how much pressure will be placed on the market for the next few months.

And then there is basis, which is the lowest its been in 10 years, coinciding with the highest carryout in 10 years. Kansas City, for example, was trading -50 earlier this year when normal values should be +10. These same spread values can be seen in the East and North too.

Considering the large crops from both South America and the U.S., it’s relatively easy to understand why beans have remained in a carry market (where the market pays to hold beans) the entire year. However, it’s difficult to understand why bean values have stayed over $9.50 (sometimes $10) for any length of time with such low basis values across the country.

I store my beans every year because I can’t logistically haul them to the processor at harvest and I prefer to move them after January. Therefore, I usually wait for a basis rally to move beans later in the year. Considering that last spring beans were trading at profitable levels while corn was not, it was reasonable to expect bean planted acres to increase in 2017, ultimately pushing down bean prices. If this happened basis levels may have eventually improved and I could take advantage.

The USDA report showed higher than expected yields and rain is in the forecast for much of the Midwest, so futures have dipped. This helped push basis to the highest levels this year. Therefore, I pulled the trigger on my 2016 bean production, receiving -.55 against Nov futures (picked up on my farm). This was 15 cents better than my local processor’s bid and 25 cents better than my local shuttle loader. And this is after subtracting freight costs and potential dividends (note, I always include all cost factors to be sure I’m getting the best price).

While basis levels aren’t where they have been compared to past years, I’m pleased I was able to sell my basis at the highest price of the year.

 

2016 market summary for beans

With basis levels secured I can calculate my final 2016 bean prices. Every year I analyze how well I did in futures, basis and market carry. Each of these marketing categories move independent of each other, so I want to identify each area of success and missed opportunity. I can then use this information to make better decisions in the future. Following details my cash value by marketing category.

As mentioned above, the basis level I set was the highest this year so far. Below is a chart of how basis trended near my farm.

image003.jpg

Usually basis gets a bump after harvest, but basis remained flat due to huge U.S. and global bean stocks. With harvest just around the corner, the potential of a basis rally is low.

 

Market carry

Bean market carry is very tricky. Carry is usually minimal (if available) because there is a narrow window when exporters want US beans after harvest, but before the March South American harvest. This year was a bit unusual because there was a fair amount of carry through August. In the end, it was a matter of playing the spread game between all the months.

The chart below shows I captured 22 cents of market carry by moving sales to Aug. I then captured another 12 cents moving to Nov futures. I did well, but it’s fair to say there were a few times where I could have made a bit more premium, however I would have had to do things perfectly and capture several inverses too. Once again, I avoided the risk of a grand slam or a strike out possibility and went for the base hit.

image008.jpg

Futures

2016 Average futures prices – $9.33

image009.jpg

There were several trades contributing to this position. The first started on 3/22/16 for $9.20 and the final was Apr 2016 (prices included 9.21, 9.60 and 10.00). Included in these positions are several options trades that included premium when beans were trading between $8.50-8.80 post 2015 harvest.

In hindsight, I’m a little disappointed in the final results of my futures positions. But, I need to keep perspective by reading my notes when I made these trades:

1. Everything I sold was ABOVE my breakeven points. Since I want to keep farming year after year, staying profitable is the most important goal.

2. Considering the significant carryout in beans, many in the trade (including me) thought there was limited upside potential. (Therefore, refer back to #1)

3. When I placed these trade orders in late 2015 and early 2016 futures were $8.72 and many feared $8 was a reality. Many farmers at the time would have considered $9.25 to be a success. Therefore, I took the opportunity when it was presented.

4. Most farmers using a risk management strategy had a similar outcome. Risk management is extremely important to the success of my farm operation, so I’m very careful to make sure risk is minimized on all trades. I want constant base hits, not grand slams with a high likelihood of striking out.

5. The eventual $11 futures was unexpected considering worldwide events. The South American harvest has a big impact on bean prices. Around 60% of global beans are produced there, so it’s easy to see why. When their harvest was wet and pods opened up and dropped kernels on the ground it had a big impact.

6. The way $11 futures occurred was an outlier. It’s not something I’ve really seen before, and it’s hard to plan for.

 

Summary of Trades

Many farmers don’t look at the three marketing categories above independently, but they should. Looking at basis, carry and futures individually allows farmers to optimize their grain marketing strategy to more efficient and profitable levels while minimizing risk. Some years (like this one) I can hit the top of the basis market. Other times unexpected events can cause basis to move differently than historical trends suggest and I don’t hit the top. This can be said for futures and carry too.

By breaking out the price categories farmers can maximize their profit potential. It’s impossible to predict the market, but farmers can help themselves by taking advantage of every opportunity out there.

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.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

 

 

Print Friendly

Related Posts

Leave a Reply