Farmers have been more concerned with harvesting than selling lately, which contributed to last week’s rally. However, I don’t think many farmers took advantage.
I don’t know if the rally will continue as farmers finish harvest this week (we finished safely last Wednesday). Many may sell immediately after harvest to ease cash-flow concerns and limit storage fees. On the other hand, government payment checks were just issued, so cash flow may not be a concern for farmers. I expect the market to be range bound between $3.20 to $3.60 for corn and less than $10 for beans in the short-term.
Increased exports and demand for soybean oil helped beans rally. These events also helped corn and wheat. As long as bean demand is strong, prices should stay positive. However, if bean demand falters, the large crop will likely push prices lower.
Yield reports continue to be positive. Even areas affected by drought are better than expected. The final carryout number next year will likely be over 2 billion bushels regardless of the final yield.
Basis remained steady for corn and beans through this recent rally. Also, market spreads don’t indicate the market is pushing to get the crop out of tight hands.
On Friday several of my Nov bean options expired.
- 5/3/16 — I bought $9 puts for 10 cents on 40% of 2017 production, those expired worthless.
- 7/1/16 — I bought $10 puts for 10 cents on 40% of 2017 production. Since the price is under $10, it turned into a $10 short futures position
- 10/6/16 — assuming beans would stay under $10 until this week, I shifted the potential Nov 2016 futures position to Nov 2017 for a five-cent premium.
What does this mean?
The sale for 40% of my 2017 beans is:
- $10 Futures
◦ Less 10 cents for the cost of the puts
◦ Less 10 cents for the $9 puts not used
◦ Plus five cents premium to roll the sale to the November 2017 futures
- Total: $9.85
Combine this with my $9.48 sale last month, and 50% of my 2017 crop is hedged at a $9.73 average.
Should I sell beans for cash now or sell for July delivery?
Interestingly, three farmers asked this question yesterday, so I suspect many more farmers may be thinking about this too. Let’s drill down on the numbers.
Spread versus Operating Loan Analysis
1) Farmers need to consider the interest cost on their operating note for waiting from Nov to Jul.
- Today’s futures value is 9.83
- Times the operating note loan interest (let’s assume) 4.25%
- Divided by 12 months
- Cost: 3.47 per month to hold beans
- 9 months interest cost (Nov to July) to hold beans: 31.23
2) Today July is trading 27 more than Nov futures
It costs 4.23 cents MORE to hold beans than the spread is paying from Nov to July.
But what about basis?
This is a bit more difficult because some processors aren’t bidding that far in advance. In a typical year though, bean basis advantages that far out can be limited because the market isn’t interested in helping pay for storage because a huge crop from South America will be available in less than six months.
So what is the best sale?
In my opinion based upon the information today January is the best sale. Currently the market is paying about 9.5 cents (spread) to hold beans until Jan. The operating loan interest for 3 months is 10.41. So, it costs about 1 cent to hold until Jan. However, the basis between those three months is considerably better. Many processors are bidding 15-20 cents more in Jan than today.
Analyzing the full cost
Too many farmers focus on the flat price of grain and not on what it costs them to get a certain price. Grain marketing is complex. I frequently mention the three main factors that make up the cash price (futures prices, basis and market carry). These factors are all very important and move independently of each other. However, there is a fourth cost that needs to be considered too, the interest cost of holding grain for either priced or unpriced grain.
Savvy farmers consider all of these costs when developing their marketing plans. The thing is, futures prices are uncertain and nobody knows where prices will be month-to-month and year-to-year. It can be so overwhelming knowing when the best time to sell is. However, some decisions can be made so much easier when you drill down on the numbers. In the case above, by doing some analysis January seems like the best decision with what we know today.
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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