Three basic market factors behind understanding crop prices

There was no bullish news last week. Without a large-scale weather issue, Chinese analysts are expecting a 7% increase in corn production next year, which would lower demand overseas for our product.  In the U.S. weather so far has been the right mix of rain and sunshine, which will provide a good start to the growing season.

Low prices on the CBOT allow the U.S. to be more competitive in world markets, which may generate a buying opportunity and allow prices to increase a bit in the short term.  However long term, if weather conditions stay favorable, it will be difficult for new crop corn to stay above $3.50.  It may even mean, similar to 2014, falling prices into harvest. A bumper crop followed by a bumper crop is extremely bearish for futures prices.

 

Beans

Beans can’t seem to pick a direction.  There were some new crop cancellations this week, however soy meal demand remains strong domestically.  Long term, the large old crop carryout and the potential large new crop being planted is weighing on the market. $10 looks like the price ceiling right now.

 

Marketing Grain

There are three aspects to selling grain.  Most farmers only focus on cash prices. But, cash prices are derived from three basic factors in the market.

  1. CBOT Prices –Many farmers don’t even utilize futures prices.  In most cases farmers would benefit (and ease their risk) by futures trading and utilizing option strategies.
  2. Basis – The spread between the CBOT and cash price the farmer receives locally for the grain.
  3. Market Carry (or inverse) – The difference in prices over time.  In other words, the premium (or loss) a farmer gets for waiting to move their stored grain until sometime in the future usually well after harvest.

 These three facets of grain marketing adjust independently of each other.  Savvy farmers will create strategies that optimize all three.   As always, it’s easiest to explain the benefits of this with real life examples.  Following are several charts based upon my farm from the 2014 crop year. (Note, all three charts show the exact same time frame.)

First Chart – CBOT – This shows CBOT corn futures prices over the last year.  The red line is the average corn price received for OUR farm.  During the time on this chart corn had a range of $3.20-$5.20.  I’m pleased with averaging $4.78 with my 2014 corn futures.

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All farmers know this piece of grain marketing is very important in delivering profits for the farm. It’s where the bulk of farm operation income is generated.  The downside — it’s extremely hard to predict where the market will go (short-term or long-term), which causes a lot of farmer uncertainty.  But, as mentioned above, there are two additional components that can add additional layers to farmer profits that are independent of the CBOT prices.

2nd Chart – Basis – The three lines below represent three locations within 35 miles of our farm that we could easily ship our grain to during the year. (Note: I have adjusted freight rates to each location and even included the COOP dividend expected, so all prices are relative to each other.)

Even within this short distance to our farm, the basis prices work independently/differently from each other.  It is never clear which location will have the best basis. Sometimes the best bid at one location isn’t even the facility I’m delivering to, but instead another grain company who has a position at that facility.  While I set our basis earlier in the year, to reduce the risk of it moving lower later in the marketing year, the chart shows the basis range for 2014 crop was 30-40 cents so far.

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If you compare the basis movement with the CBOT price above, it is clear how many times the CBOT and Basis do not move in tandem.  In fact, often they move in opposite directions frequently throughout the year. Late July through early September last year is a great example of that.  I’m pleased that for our farm we set the basis price basically at the top of the basis market.  This meant an additional 30 cent profit compared to delivering my grain at harvest, with what looks to be a great futures price.

 

3rd Chart – Market Carry

Market Carry is only available once the crop is priced and usually farmers need to have on-farm storage to capture the most potential from it.  As time progresses the amount of market carry available decreases until finally after May it’s no longer available.  The best chance for market carry in any year will usually be before December.  Our farm received a 29 cents market carry premium, which was at the top of this year’s potential.

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Using on-farm storage to take advantage of market carry is the most profitable.  Many farmers mistakenly think on-farm storage should be used to hold grain waiting for the “best CBOT price.”  Not only is that impossible to guess when it will happen, it holds SUBSTANTIALLY more risk.  Using market carry to optimize profits is the less risky way to take advantage of on-farm storage.

Many farmers don’t realize that commercial grain companies have been utilizing basis and market carry like this to make the bulk of their profits for decades.  I constantly urge farmers to think like these companies and CO-OPs, in order to get all the profits available to them.  They need to avoid leaving money on the table.  Not only is this strategy proven to be more profitable, there is less risk to the farmer too.

While these examples are of my family’s farm operation, I also educate clients on how they too can receive similar results for their grain marketing plans.  Are you nervous that corn prices may not go up?  Are you sitting on unsold 2014 corn unsure what to do?  Do you want to see if you are making the most of your corn’s profit potential?  If you answered yes to any of these, reach out to me to talk more about the options available to you.  Often I can explain opportunities farmers didn’t know were available to them.

 

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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