Almost like clockwork this previous week, unpriced farmers sold most of their remaining grain stored at elevators that was still on DP. By some estimates the amount of corn sold could have been nearly 10% of the ’16 production. Unfortunately, this price slide in late August has become a common trend the past several years. After several days of farmers selling at disappointing levels, there was a small bounce last Thursday and increases since then.
With many DP programs behind us, it’s still uncertain if the market will now continue to trend higher. There are still farmers with unpriced grain in home storage that may need to be sold before harvest. Some elevators are letting farmers deliver old crop against new crop sales. This could help prevent further decline in prices.
There is simply too much grain in the U.S. and globally. This heavy supply will continue to weigh on prices until at least March 31 when ’18 planting intention estimates are reported. Then the cycle continues with weather controlling the market. Seems strange to talk about next year’s weather impact, when ’17’s weather impact largely is ending this week.
Which crop should I store this year?
I get this question every year, and my answer is always the same. First, you store seed or specialty crops (this basically includes everything but regular wheat, corn or beans). Second should be wheat (hard red and soft red specifically). Third is corn. If there is still room left, store beans.
Why? When making storage decisions, the biggest factor for farmers to consider is interest and cash flow needs. If you have an operation loan you can either pay the loan off at harvest with sold grain, or store it waiting for higher prices (and pay interest). It boils down to basic math (assuming 5% loan interest, $9 bean prices and $3.50 corn prices).
- Beans cost 3.75 cents per month to hold ($9 x 5% / 12 months)
- Corn costs 1.45 cents per month to hold ($3.50 x 5% / 12 months)
What is the market telling me to do?
Another factor in storage decisions is the spread between near and future months (market carry). I look at storage time from Nov. 1 because both crops would sit in the bin for the same amount of time. Beans have a slight advantage because they are hedged off of the Nov futures contract verses corn being based off Dec futures.
• Nov to Mar is currently 19 cents (four months, November to March – 4.75 cents per month)
• Nov to July is currently 34 cents (eight months, November to July – 4.25 cents per month)
• Dec to Mar is currently 13 cents (four months, November to March – 3.25 cents per month)
•Dec to July is currently 27 cents (eight months, November to July – 3.375 cents per month)
Based upon these numbers alone, the market is encouraging farmers to store beans versus corn. But next farmers need to balance interest costs and market carry premium.
- Beans (hold in the bin for 8 months) — 0.50 cent per month (4.25 carry – 3.75 interest)
- Corn (hold in the bin for 8 months) — 1.45 cents per month (3.375 carry – 1.45 interest)
Considering this, corn is nearly 3x more profitable to store than beans, but the market potential on beans is greater than corn. The bean market could easily move up or down $1 to $2 per bushel versus corn which is more likely to only move around 50 cents to maybe a $1 per bushel. However, that is a futures issue, not a storage consideration. It’s nearly the same cost per bushel to re-own either beans or corn in a futures position. So, even if a farmer thinks there is huge upside potential in beans, it’s better to sell cash beans and re-own the grain in the form of futures. That would have the nearly the same risk as leaving the grain in the bin unpriced waiting for a rally.
What about basis? Basis can be a factor, but usually a very minor one when deciding what to store at home, so I don’t usually include it. Last year basis movement was nearly the same for corn and beans throughout most of the Midwest.
Basis is more of a factor in commercial storage decisions. Typically commercial storage rates are 5 cents per month. It’s rare for basis to increase that fast over time. This is one of many disadvantages for farmers in using commercial storage, and why I usually recommend against it.
If I couldn’t store my beans, I would sell them at harvest. Even if I think prices will go higher, I can generate way more cash flow selling beans upfront and re-owning them with futures for the same risk.
Why store wheat before corn or beans?
Farmers harvesting all three crops need to also examine wheat spreads when making storage decisions.
- Holding Dec to July (eight-month carry, using the same November to July time frame – 6.25 cents month, 50 cents total)
- Wheat interest is 1.9 cents per month (assuming cash wheat at $4.50)
- Storing wheat profit is 4.25 cents per month
Mathematically, wheat is the clear winner in terms of storage profit per month.
- Wheat — 4.25 cents per month
- Corn — 1.45 cents per month
- Beans — .5 cents per month
What if the market doesn’t rally?
This is the risk of keeping unpriced grain in the bin. There is no guarantee that any commodity price will rally.
This is why I strongly advocate getting crop sold at profitable levels and then work the spreads to capture premium (detailed above). Remember: farmers can only capture carry if the underlying commodity is already sold.
Do you have all of your 2017 crop sold?
Unfortunately no, I’m behind. I prefer to be 90% sold by this time, and I’m only around 50% priced (pending upcoming futures values through November). Like many farmers, I thought there was upside potential back in June. Clearly with hindsight I would do things differently, but I made the best decisions I could with the information I had at the time.
Now more than ever, I need to squeeze as many cents out of the market I can. I’ll do that by working options and futures positions to get market premium, while still managing and minimizing my risk exposure.
I also need to do some storage analysis to determine how much of each crop I need to hold and for how long. Like my examples above, I’ll look at market carry opportunities and interest payment factors to help me make the best decision for my farm operation.
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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