By Jon Scheve, Superior Feed Ingredients, LLC
In the last 15 trading sessions, July corn futures closed higher on all but two of them for a total of a $1.40 per bushel increase. Corn hasn’t increased this quickly since the end of June during the 2012 drought and it’s only been 53 weeks since the 11-year market low of $3. Last week prices exceeded $7 — a level only seen three times in history, with the last time being spring 2013.
Prices are high because of Chinese demand and continued dry weather in Brazil. U.S. weather hasn’t even been an impact yet on these markets. Despite another week of increased prices most end users are staying profitable, which seems to indicate there is still more upside potential down the road.
The new crop corn-to-bean ratio shifted dramatically to favor planting corn this year. The western Corn Belt has already made substantial planting progress; however, the eastern Belt has been delayed by rain and the northwest is still quite dry. There is still plenty of time for eastern farmers to catch up on planting and for rain to fall in the northern states.
Back in early December I set basis on all the 2020 beans I produced at the best basis values seen near my farm in 6 years. While I set the basis level, I did NOT set any more of my futures prices at the time. Instead, as I sold the basis, I set the cash price and bought futures back in my hedge account. This allowed me to get paid for the cash crop and pay off my operating note. Plus, with the long position in my hedge account, I could still participate if the market rallied further, which at the time I felt was still likely.
From a futures value movement perspective, the risk for holding cash grain in storage and holding a long futures position in my hedge account is the same. However, by setting my basis value any risk or opportunity in that area is eliminated, additionally I don’t have any more interest payments, and any storage quality risk is no longer a factor.
When I made the cash trade, I bought futures back in the January ’21 contract. At the time, I had 50% of my ’20 beans sold in January futures and the other half was still unpriced. This meant I was now long on 50% of my beans on January futures as the sales hedges were offset. All I had to do now was pick a time or price when I would sell the remaining futures positions back out.
By late December when January contracts were about to enter the delivery period right before they expire, I chose to roll these positions forward as I continued to feel there was more upside in the markets. I selected to move my position to the March contract and collected 1 cent of premium due to the January/March futures inverse spread at the time. Then again in late February as March futures were about to enter the delivery period right before they expire, I rolled the contract again, this time to the May contract, which cost me 1 cent due to the March/May spread being at a carry.
I had considered selling the May futures if prices neared $15, but I never placed an order as I waited to see how the market would react during the spring. During the second week of April beans went from $13.80 to $16 in 14 days. Plus, May futures gained significantly on the July contract while U.S. basis levels rallied, suggesting bean shortages and potentially even more futures rally potential was yet to come.
Consequently, on April 27 with only 2 days left to trade on the May contract before it entered the delivery period leading up to its expiration, I rolled my May long position to July futures for a 35-cent profit. This is a result of the May/July futures spread being in an inverse, where the May is higher than the July.
In the chart below the red X shows where I rolled my May futures to July compared to the available spread opportunity for the past couple months.
In this type of “roll” trade I sell my May long futures positions at a higher value than where I buy back the July futures at the exact same time. My overall position doesn’t change as I’m still long futures except that now they are in the July contract. The actual value that I buy, and sell doesn’t matter either, I’m only concerned with the spread between the two contracts. This trade gives me 35 cents of additional profit that I can add to the final price that I ultimately set my futures at on the remaining bushels I have left to price.
With my long futures positions now in July contracts, I’ll need to decide when to sell before the end of June or face the possibility of having to roll my sale forward again. Like corn, bean prices have increased in 15 out of the last 19 trading days on the July contract for over a $2 per bushel move. I certainly hope that July futures will exceed the high level that May futures are currently trading but that is certainly not a guarantee. Like many farmers, I wish I had a crystal ball to tell me where and when the top of the market will be.
Please email firstname.lastname@example.org 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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