By Jon Scheve, Superior Feed Ingredients, LLC
The corn market finished last week on the lows. The estimated 2020 corn yields are increasing every day, while many farmers still sit on unsold 2019 corn. Time is running out to get old crop sold and moved before harvest starts.
A change in price direction due to weather is unlikely right now. National yield estimates are above 180 and the latest drought index shows only 18% of the Corn Belt is facing drought conditions.
Western Iowa is currently experiencing dry conditions. However, keep in mind that western Iowa also has some of the best subsoil moisture capacity in the U.S. too.
So, while there may be drier conditions in western Iowa, yields may not be as bad as some believe in that area. Plus, I’m hearing preliminary yield reports ranging between “very good” and “potentially record good” on the fringes of the Corn Belt. Those fringe areas are probably large enough to offset the dry areas of Iowa.
The best potential for a rally is likely increased export demand. On a positive note, China increased corn purchases recently; however, it may not make up for increased or record yields at harvest.
In each of the last 6 years, corn traded between 15 to 45 cents lower from early August through September. However, in 5 of those 6 years, corn prices bounced back between the end of September and Thanksgiving. So, while prices may dip further leading up to harvest, they should be able to get back to these levels before snow falls.
Several years ago, our farm increased on-farm storage to capitalize on corn spreads, because historically the market paid 40 to 50 cents to hold corn for an additional 12 months. To capture this money, grain must be sold on futures, so I can “roll” my sales forward to capture the carry. Each year I make it a priority to have all my grain sold with futures by Sept. 1 so that I can capture this carry until the following summer.
- Bin Loan — About 30 cents per bushel but for only 7 years on our farm
- Operating loan interest on corn held in bin — Holding corn costs around 16 cents per year ($3.75 per bushel cash corn at 4.25% interest)
On average, the market pays for the expense to build extra storage and any interest on holding the cash corn in the bin if the futures are sold against it. If I keep the grain in good condition and summer basis levels are consistent from year to year, I should be able to cover my expenses, while building equity in my bins. After the 7-year loan is paid, my profit potential will increase even more. In the last 2 years that I have been doing this, basis and carry levels allowed me to make a profit after both expenses above were considered.
My 2018 crop basis history
At the end of April 2019, before any weather issues were known, I set basis for the first 60% of my 2018 crop at -19 picked up on my farm (represented by the red X on chart). At the time, this was tied with the best basis seen near my farm in 5 years, and it seemed likely basis would trade similarly in the summer of 2020. So, I kept my hedges on the remaining 40% of the ’18 crop in the bin in place and planned to “roll” these sales eventually to 2020 hoping to capture the usual 40 cents of carry on the balance of the ’18 crop I was going to store.
It then rained 40 days and 40 nights
The market changed dramatically as crops couldn’t be planted. By the end of June I had to make a decision on where to “roll” my July ’19 hedges. Unfortunately, I had to do this before the shocking USDA Acreage Report.
What did you do?
Before the report on June 30 corn bushels were expected to be extremely tight and a market scenario like the 2012 drought year seemed likely. Historically, when the U.S. is low on corn, basis across the country will skyrocket. In the chart below the red dotted line shows how much higher basis could go if the carryout was reduced the way it was in 2010 — 2012.
With history as a guide I expected carryout to be substantially reduced, which has caused the carry in the market is very small or can even invert in the past. A day or two before the report I chose to take the guarantee of a 20-cent carry and I rolled my July 2019 sales to July 2020. This was half of what I usually expect to collect on a carry for rolling out a year. However, the basis potential for the following year seemed high when looking back at the years when carryout shrank substantially. That basis potential seemed like it could make up the difference of taking the lower carry.
But that isn’t what happened:
- Farmers pushed past prevent plant dates and planted a lot more corn than anyone expected
- Then nearly perfect growing conditions throughout the Midwest all season long led to widespread high yields
- But for months the market suspected the USDA was over-estimating crop still left in bins, and as late as February 2020, basis values were still trading at stronger than normal levels.
- A phase 1 trade deal promised the potential for some corn to be shipped to China.
- By February it seemed as though basis levels might be going as high as last summer
- Then the pandemic struck in March, crippling ethanol demand and sinking the basis within a week.
What did you do?
By May my ‘18 corn was still in good condition, but it had been in the bin for 17 months. So, I moved the last 40% of it before the summer heat and sold it for 6 cents less on basis than the year before.
Why didn’t you sell it on last August’s basis rally?
Since I had already rolled the futures to July 2020 and collected 20 cents, I would have had to roll back my sales. By August of last summer when the basis rallied the spread also widened out and it would have meant that I would need to take a 10-cent loss on the spread, which would have wiped away most of the basis rally. Plus, it seemed reasonable at the time that the basis values of last August last year would become available again by summer 2020.
So, did you lose a lot of money?
The 20 cents carry profit covered a full year of interest (i.e. 16 cents) for holding my corn. And with the 6-cent hit to basis year over year, I’m only out about 2 cents on the trade.
Unfortunately, I didn’t cover this year’s bin payment. However, I’ve made small profits the last 2 years that helps to offset some of this year’s payment. With lower interest rates now, it might make sense to refinance the bin payment and stretch it out a year.
As I’ve said before, my grain marketing strategy is most profitable during normal/average years. In the last 16 months multiple records and unforeseen circumstances have majorly impacted the market. It’s easy to want to throw in the towel and start betting on longshots. However, historically the strategy to store part of the crop for an extra year should work in most years. Eighteen months ago, it would have seemed crazy to bet on 30% of the corn not getting planted on time followed by a global pandemic that wipes out ethanol demand and cripples the economy…. but here we are.
Please email email@example.com with any questions or to learn more. 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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