Using storage and risk management to get $5.90 corn

By Jon Scheve, Superior Feed Ingredients, LLC 

Delays in planting across parts of the Corn Belt sparked a rally in corn last week. If a large portion of the crop isn’t planted over the next two weeks, futures could continue to rise. However, if there seems to be enough opportunity for farmers to make significant progress in planting, then the market will likely pull back.

Setting corn basis on the 2023 crop

I have 100% storage capacity for all my crop production on my farm. This helps with harvest logistics and allows me to maximize profitability from more basis opportunities and market carry.

Within 60 miles from my farm, there are two ethanol plants, six feed mills, and four rail shuttle loaders. Since I never know which location will have the best bid each year after harvest, HTA (Hedge To Arrive) contracts are never a profitable option. Usually, I can even get a premium to what my local markets are bidding, if I sell my corn picked up on the farm and let someone else haul it away, which can sometimes be up to 500 miles. I get these premiums by being flexible, using futures to hedge, and storing all my grain at home. 

This year on April 2, I set basis on my entire corn crop at 0 against the May contract for April shipment. This is shown on the chart below:

The green lines represent the 3 best bids available in my area. Note, the commercial freight rates to move the grain to each location are subtracted from each bid, so I can compare all bids equally picked up on my farm.

This year the best bid was for the grain to be picked up on my farm and hauled outside of my immediate area. I don’t know where it’s going, and I won’t be hauling it. All I have to do is load the trucks when they come.

The basis value I received was the best I saw for the year. While the chart does show a bid for 5 cents higher in November, that was only available from one buyer for a 5-day shipping window over Thanksgiving weekend. I couldn’t find a truck to haul during that time period. Plus, I didn’t want to set my basis in November, because the bid was against December futures, and I planned to have my sales set against May futures.

Why does that matter?

The spread between futures contracts is how the market pays for someone to hold the grain until it is needed. At the end of November, the spread was increasing a lot because the market had too much corn that needed to be priced from all the harvest delivery. 

This chart shows how quickly the spread increased to incentivize more grain shipment later in the marketing year.

I moved my hedges from the December contract to the May because at the end of November I could collect 37 cents to basically store my grain until April or May.

Did you have to set your basis in April, or could you have waited longer?

I could have waited longer, or even rolled my hedges from May to July, hoping for better basis values in the summer and collecting even more for storing it.

Why didn’t you wait?

I was able to procure a bid of 0 basis, picked up on my farm, which was 10 cents better than any other bid in the area. A 0 basis, picked up on my farm, was also my goal for the year and it fell within the ideal timeframe I had set for myself to set basis over the winter. 

Plus, I knew a lot of farmers still had unpriced corn in their bins. This meant any futures rally would likely be met with farmers selling cash corn. An increase in cash corn sales would likely mean end users would start lowering the basis. And even if basis did manage to go higher for some reason, I wasn’t sure the increased value would be enough to offset my monthly interest cost to wait longer. 

I won’t know until mid-summer if I made the right decision, but I’m happy my goal was hit, and I’m finished marketing the 2023 corn crop.

Where does this leave your final price?

Between my futures sales and my options strategies, I had a $5.54 December futures value. I then collected an additional 37 cents when I rolled the hedges from December to May, which gave me the equivalent of a $5.90 May futures value after all commissions. With a 0 basis value on my farm in southeast Nebraska, my final cash value for all my 2023 corn is $5.90. Obviously with cash corn in my area trading near $4.50 right now, I’m extremely happy with my final 2023 corn price.

If you would like to understand more about how to protect downside risk and use storage to increase profits for your operation, please reach out to me.

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, Neb. 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.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results.

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