Beans surprised everyone last week by rallying over $10. If exports remain strong, bean prices may stay at these levels. However, Gulf basis levels (export values) are at 10-year lows, these low basis levels often are an indicator that futures prices are too high longer term.
Eyes are on South American weather as the summer approaches. Similar to last year for North America, there are drought/La Niña concerns going into summer, which are propping up prices. If La Niña does not develop, just like it didn’t in our growing season, then prices won’t likely stay at current levels.
Corn continues to go nowhere and still is trading under $3.60. End users are mostly only buying immediate needs at these prices, waiting for prices to dip back below $3.40. Farmers, on the other hand, are largely waiting for better prices, because in recent years they have been rewarded for holding.
There’s been some action in corn basis throughout the Midwest at ethanol plants and feed mills. Some of this is due to smaller end users not getting as much corn as expected during harvest. Maybe holding the corn will reward the farmers again.
Do not give your storage away
In order for farmers to get bigger premiums and profits out of the market, farmers need to think about grain marketing differently than the “common” or “conventional” wisdom. This is especially true in years when grain prices are close to breakeven points. The following is an example of a common mistake I see among farmers that don’t have 100% on-farm storage.
Usually I see farmers make sales for Dec or Jan delivery as their first and only sale before harvest. Often they do this to get the market carry as a premium. Most farmers do this because conventional wisdom says farmers need to core out their bins then, so selling some grain makes sense. However, this wisdom is only true for farmers with 100% on-farm storage and the wrong thing to do for those that do not. Let me explain.
In June, corn prices for December delivery were $4.40, while harvest delivery was $4.30. Basically, it means there was a 10-cent premium to hold the grain for two months after harvest, or about five cents per month. Many farmers that don’t have 100% on-farm storage know they still need to core their bins sometime in the winter. That is why they originally sold for December delivery to capture the carry, thinking they were getting the best deal. However, these farmers still have to deliver grain at harvest because of their lack of storage. Today the market is under $3.60 and many farmers don’t want to sell their grain at these levels. So, they will pay storage fees at their commercial facility, which are likely at five cents per month, waiting until prices go up.
Farmers that tried to capture the carry early will wipe away all the profits from the original trade waiting for better prices on the unpriced grain in commercial storage. Many wind up paying around 30 cents to store grain until the spring. By doing this, the 10-cent premium on the grain they sold first will eventually be wiped away, creating a net loss of 20 cents on their marketing program. Most farmers are too focused on cash prices and not paying attention to expenses of storage.
I understand the need to core bins in the winter. Farmers that are trying to take advantage of the market carry for Dec delivery makes some sense. However, farmers really could wait until the end of January or even February to core bins. If they were to do this, it would give them an extra two months’ worth of free storage in their own bins at home. This would allow for a longer time period for prices to move and possibly basis levels to improve. Thus a farmer doesn’t give away any storage.
It’s difficult for farmers without 100% on-farm storage to estimate how much storage they will need each year. This is why I like to use futures — it gives me the flexibility to decide when, where, and how much grain I want to move at harvest or the middle of winter. I can still pick up the 10 cents of carry once I’m done harvesting. Flexibility in your grain marketing strategy (and sometimes going against “conventional wisdom”) will lead to increased profitability.
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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