How low do we go?

Farmers certainly don’t want to be sellers at this price level. However, some were probably forced out of positions they carried for the last year on “free” DP grain that came to an end on Aug. 31. Many are saying the end is near, but that may mean 10% from the bottom. Corn could potentially drop another 30 cents, which is scary for unpriced farmers.

I also think it’s close to bottom, but I don’t know when it will be. Wheat is trading at 10-year lows (below $4) and is working into the feed market. So, bushels traditionally filled by corn, are not going to happen. Some farmers are signing up for LDP right now. Hopefully Brazil will need some feed wheat or corn and buy from the U.S., but I’m not sure it will help the markets much. Will we see a yield reduction in the September USDA report? Will it be large enough to make a difference? I’m not expecting it at this point.

 

Market Action

1. Holding grain from 2015 to 2016

For the first time in 40 years we are going to hold 10% of our 2015 production into the next marketing year. We have capacity to store it at home and it’s in excellent condition. I’ll likely lose 1% moisture, but with corn at $3, it only means 3 cents. Combine this with the interest on my money (5% = 1.25 cents/month), which means it is costing me 8 cents to hold this grain until after the end of the year.

Why would I do this? The market is currently paying 11 cents to hold until Dec. Basis in Dec is 5 cents better than anything I have seen in the last few months. So, while I could net 7 cents in this trade right now, the market is suggesting I hold this crop until spring or summer next year.

This is an example of why I always suggest farmers get to 110% storage capacity. Sometimes the market provides opportunities if farmers are flexible.

 

2. Market carry

I needed to move sales of last year’s crop and some of 2016 from Sep to Dec, which was an 11.5-cent premium. This means buying back Sep and then selling out in Dec. Since Dec is worth more, I take the premium.

The first rule of business is buy low and sell high. This trade is very simple and shows why I always want to be a seller of corn in the future. Typically there is a premium for corn from the current month to a future month (market carry). Since I’m sold already, and I want to continue to be sold to get the market carry premium, I have to buy Sep (the lower value) and sell Dec (the higher value) both at the exact same time.

 

Closing out the marketing year for 2015 corn crop

At the end of August I review the successes of the marketing plan from the last year. With hindsight I can see which trades did better and worse given the conditions and outcomes of the market. Each year is different and a plan one year may not work the same the following year. Marketing plans need to be adapted to the conditions of the time. Analyzing this helps me make better decisions in the future. Following shows the three categories of my marketing that I review to determine the cash price I received.

 

Futures

My 2015 corn was sold for an average price of 4.535, as seen by the red line in chart below.

ScheveSept1

I received a value above what the market traded because of long-term planning. The first trade was a put protection plan (that doubled as an insurance supplement) in May 2013. By Nov 2013 this trade looked like it would be best used as potential protection for the 2015 crop, since by then my 2014 crop was protected and the guaranteed levels were well above my breakeven points. So, I rolled my protections forward with market carry at higher levels.

Many farmers back then took the put profits in 2014, but I was concerned prices would decline in the future considering the potential heavy global supply and carry out, so I used those puts to protect my long-term downside rather than make a quick profit in the short-term. Obviously this decision was a very good one, knowing what we know today.

 

Basis

In most years (seven of the last eight) I’ve managed to sell at the top of the basis market. Unfortunately, this year I was disappointed that I didn’t. I did everything the same as in previous years, so why didn’t it work this year? There were two reasons.

 

Reason No. 1 — Weather

I assumed (correctly) last winter that farmers wouldn’t sell in the mid-$3s, which was below many farmers breakeven points. Therefore, I thought local markets would raise basis to acquire the bushels they needed, and this did happen through Mid-Dec. However, I didn’t expect it to rain 13 inches throughout the upper Midwest on many U.S. corn piles (which hadn’t happened since 1993, 22 years ago), forcing elevators to move grain much sooner than planned. This sudden movement of grain caused basis at ethanol plans to fade lower.

 

Reason #2 – Deferred pricing (DP)

End users provided more creative DP offers than ever before. This led to more farmers than ever signing on to move their grain, but price it later, hoping for a summer rally. I really didn’t expect so many farmers would participate in these marketing schemes.

Then summer came and the market took off due to dry weather rumors. Similar to other farmers at the time, I thought a run on $5 corn was a possibility, and if it did, a flood of farmers would sell old crop corn and basis would crash, so I tried to set my basis ahead of that. Unfortunately, the rally was too short and few farmers sold. Ultimately, I picked one of the lowest basis values before the market crash and basis would come off the bottom. One small bit of comfort: it was still 5 cents above the value at harvest, so I took some profit.

Below is a chart showing basis levels for the year.

ScheveSept2

Note: the purple spike in June was due to DTN not reporting for two days. That value was not actually available in the market

 

Carry

Most farmers completely dismiss carry and instead focus on trying to capture market rallies in the future. Since I never know if or when market rallies will ever happen, I prefer to take the sure (less risky) bet by taking advantage of market carry. Therefore, I always try to have my crop priced before harvest. For 2015, I collected 18.5 cents. In most years I want to get closer to 25 cents, which I consider to be about average.

 

Why was it lower than expected this year?

The 2015 yield estimates were expected to be very high, so at the time I thought there would be a lack of storage options, which would make the market pay to hold and keep it stored at home. However, the eastern Corn Belt was short on corn, which led to less corn stored in commercial facilities near the delivery elevators on the Illinois and Ohio rivers. This limited the pressure on storage and need for grain, which pushed down the carry in the market.

ScheveSept3

Did it pay to store grain?

Many farmers ask me why I store grain when I have such great sales on. There are two reasons.

 

Reason No. 1: Storing grain allows me the opportunity to capture carry and basis premiums in the market.

 

Reason No. 2: I can reduce my moisture discounts using my bins instead of paying commercial rates. The following example from my farm illustrates the benefits when factoring moisture discounts (five cents/point) and 1.5% shrink discounts:

  • 25% harvested above 18% at approximately 18 cents savings
  • 50% harvested 16% to 18% at approximately 12 cents savings
  • 25% harvest below 15%, no savings
  • Flexibility to blend lower and higher moisture corn is a 1- to 2-cent savings
  • Estimated average savings is approximately 10-12 cents

There are some costs that need to be factored in though, including five cents to load/unload bins and run fans and the interest cost to sit on grain (5% against $3.50 per bushel) is 1.4 cents per month (i.e. 10 months is 14 cents).

 

Summary of storage performance for 2015

Market Carry $.185

Basis Appreciation $.05

Drying savings $.10

Loading/Unloading Bin -$.05

Interest expense -$.14

Total profit $.145

 

This year I didn’t cover the cost of my bin payments of 28 cents. However, the past 4 years I have been extremely profitable compared to savings versus bin payment costs, so when averaged I’m still ahead. It’s important to remember that bin costs are are a sunk cost, I have to pay them regardless if I use them. However, in two years the bins will be paid off and the benefits become pure profit. It’s a long-term profit plan for my farm operation.

 

Summary for 2015 corn

Futures

This year my futures trading that started in 2013 was my best decision (maybe my top trades of all time). In baseball speak, I would consider it a grand slam.

 

Carry

This was about average. I’m pleased with the premium, but in hindsight there was a few cents of lost potential. I consider this a single or double.

 

Basis

This was my worst basis trade ever. Atypical situations combined with me waiting too long to pull the trigger resulted in a lost opportunity of 20 cents. At best I advanced the runner (I did better than basis at harvest) and at worst I hit a ground up the first base line for an out.

 

This illustrates why farmers need to consider these factors independently of each other when forming their marketing plans. While this year I hit a grand slam in futures, basis suffered. In previous years basis was a home run and futures was only average. There are so many things out of farmer’s control affecting prices, basis, etc. that optimizing each of these factors independently for the most potential profit possible is the best way to diversify and minimize risk.

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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