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Collecting soybean carry

By Jon Scheve, Superior Feed Ingredients, LLC

Corn and beans rallied last week because rain swept through the Midwest slowing harvest. In select areas where harvest is behind, processors are bidding up for grain. It’s unlikely these basis bumps will last long, but some lucky farmers who managed to harvest some grain early could benefit.

The slow harvest progress may help corn from sliding all the way back to lows from two weeks ago. I doubt beans will be as lucky. There are just too many in the fields and as they get harvested it could be too much for the market to deal with.

 

Collecting bean carry

On 8/30 the November to July bean spread was a 49-cent premium. With all of my bean sales hedged against November futures, I was concerned about the current low basis levels. Since I can store all of my 2018 harvested beans and I have all of my beans sold, I moved my sales forward to capture the 49-cent carry. I did this by buying back my November beans futures and immediately sold July bean futures for 49 cent higher.

As always, as long as the crop is sold, the price level of the bean futures trades doesn’t matter. Only the spread value matters when collecting the carry because the sales are still in place.

 

What does it cost to hold the beans in the bin that long?

Since I could sell the beans immediately at harvest, there is a cost to hold grain and not pay down my operation note. That 49 cents enables me to collect 6.125 cents per month until summer when basis levels may be better (49 cents per 8 months of holding from November-July).

Assuming a $7.50 per bushel cash value in southeast Nebraska this week and a 6% operating note, it costs me 3.75 cents per month to hold the grain in the bin. With the 6.125 cents carry premium, I’m actually making a guaranteed 2.375 cents per month on the carry to hold the beans (6.125 carry premium – 3.75 loan interest). That would mean I can guarantee myself 19 cents of actual profit to hold the beans until summer.

 

What about basis risk?

Basis could get worse if the crop is bigger than estimated and futures have a large rally and trade issues don’t improve. So, I still have basis risk. Another contributing factor is the upcoming South American growing year. While a crop failure may cause a futures price spike, it doesn’t guarantee a basis rally. How China, who consumes 60% of the world’s beans, would handle any bean shortages from South America during this trade war becomes a big factor. If the trade issues remain unresolved well past the election and China refuses to accept U.S. bean imports, basis values may go down further.

That’s a lot of unknowns that are impossible to predict. While I know I have risk with the basis I’m going to instead look at historical trends for the basis in my area. Those trends support the notion that bean basis usually improves after harvest. If that happens, my bean profits will also increase.

 

The importance of separating futures, market carry and basis

Collecting market carry is one of the least risky ways to guarantee additional profits for my farm operation from storing grain. While I didn’t set the basis in the example above, I could have set basis in July for the same levels as current harvest delivery, which would have guaranteed me those 19 cents of profits. Historically, it’s been more advantageous to wait until further in the future to set the basis, so I made the decision to wait on setting a basis or even picking a location that I will sell cash beans to. That is why I continue to keep my sales in place using July futures.

In hindsight I’m very glad I sold 100% of anticipated 2018 bean production last February when November futures were $10. With what I know today, that was a good decision. I’m also pleased I was able to add the additional 49 cents of market carry to my sale price too. At the time of the trade above that had been the highest carry I’ve seen in the bean market in the last 10 years.

The example above illustrates why it’s so important to look at the futures price, market carry and basis separately within a grain marketing strategy. These factors move independently of each other, and if considered separately, it’s possible to maximize the potential opportunity within each one, offering the best farm operation profit potential.

 

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.

 

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