Merchandising unpriced corn and soybeans will likely prove challenging this winter. By August, U.S. corn ending stocks are forecast at 2.437 billion bushels, the highest level in 30 years.
Soybean ending stocks are forecast at 445 million bushels, the highest level in more than a decade.
Other than short-covering (commodity funds buying back their short futures positions), you can expect very few supply or demand surprises that could bring speculative commodity funds back into the futures markets. Perhaps soybean futures prices could rally this winter with weather uncertainty in South America. A mild La Niña growing-season forecast could lead to hotter and dryer conditions in Argentina and southern Brazil.
In developing an old-crop marketing plan, consider the futures price carry, local basis and your cost of grain ownership.
Futures carry is defined as the difference between nearby corn or soybean futures and the more distant or deferred months of March, May and July. By late fall, futures carry was 30 cents from December to July for corn. This amount is nearly full carry and would likely cover the cost of on-farm stored bushels but not those bushels stored commercially by farmers. However, to capture this carry a farmer would have to sell in the deferred months (May or July) via a hedge or initiate a hedge-to-arrive (HTA) contract using those same months and make a spring delivery of bushels. That basis could then be set in the spring when basis tends to narrow.
Merchandising like your elevator
As you drive around Iowa and surrounding states, you will notice many elevators and co-ops have large bunkers of corn stored temporarily outside with covers. Ask yourself, “How will they make money on those bushels?”
The answer is simply that grain merchandisers lock-in futures price carry, understand their local basis and know they have a relatively low cost of grain ownership. Elevators and co-ops do not take futures price risk. When they buy corn from a farmer they plan to store, they sell the underlying futures contracts that represent those bushels. When the bushels are processed or delivered, they buy back those contracted bushels in the same futures contract month. They will often roll their futures contracts forward to maximize futures carry as currently exists in the futures markets.
Pay attention to corn basis trends
Basis is simply the local cash price minus the nearby futures contract. It reflects the local supply and demand for corn and can vary by processor, river terminal, elevator or co-op facility.
The graph below shows examples of the corn basis trends at a central Iowa elevator versus the March futures each year since the 2012 crop. The line begins with harvest in October and ends approximately March 1, when the contract goes into delivery.
Basis trends vs. March corn futures, central Iowa elevator (Source: Iowa Commodity Challenge, Dec. 2017)
Note the pattern each year is that the widest corn basis will occur during harvest in October. The basis was much narrower (a smaller, negative number) for both the 2012 and 2013 crops. Compare this to the last four years as U.S. ending stocks have increased and basis is much wider (a larger negative number). Note the trend since 2014 is for basis to narrow or strengthen from 15 cents to 20 cents per bushel from late harvest until early January. Thus, most of the basis appreciation for the winter is realized in this roughly six-week period.
Expect limited basis appreciation in January and February despite the dismal nearby March futures contract prices. That is because large volumes of corn will need to be moved out of temporary storage and farmers need to meet their winter cash flow needs by selling cash bushels.
Cost of corn ownership
Knowing your cost of grain ownership for stored bushels is critical. The following 2017 corn crop assumptions are used: Cash corn is valued at $2.97 per bushel at harvest (Oct. 26) in a central Iowa elevator. Interest is accruing on stored grain at a rate of 5% annual percentage rate.
Cost of grain ownership, central Iowa elevator (Source: Iowa Commodity Challenge, Dec. 2017)
Note that the on-farm storage line (checked line) is estimated at 1 cent per bushel per month, while commercial storage line (dots) is 16 cents for the first 90 days and 2.8 cents per bushel for each month thereafter. Note that both of these lines are anchored to the cash harvest price of $2.97 per bushel. Storage charges will vary depending on your own on-farm storage facilities and local elevator or co-op charges.
The dark solid line is the cash price bid at this elevator weekly since harvest. Bushels stored on-farm have a better chance of being sold above the cost of ownership than do those bushels stored commercially. If recent history is any indication, the likelihood of selling those cash corn bushels above the cost-of-ownership lines could be limited if delivering to that elevator. Significant corn futures price increases (more likely in the spring months) along with basis appreciation will both likely be needed to benefit the cash prices being offered above the cost of ownership.
Get a marketing plan
Many farmers are storing record amounts of unpriced grain and face wider-than-normal basis, especially when bushels are stored commercially and where giant bunkers of corn exist. Expect many of these bushels in temporary storage to keep pressure on the local basis and thus cash prices throughout the winter and well into the spring and summer months.
Cash corn prices will need to increase enough to provide a profit margin over the cost of your grain ownership. Expect financial pressure this winter for some farmers, especially for those storing a large number of unpriced 2016 as well as 2017 bushels. This issue is likely compounded when a large percentage of those bushels are in commercial storage where wider basis exists.
Calculate your own cost of ownership for stored bushels. Consider creating line graphs like the example provided to assist your marketing plan and as a reminder that storage and interest are not free. Also, track your local basis weekly where you typically deliver your corn to better determine basis trends. Consider using a variety of marketing tools, including basis or minimum price contracts, so you can eliminate storage costs and lock-in the basis, if attractive. However, if you make cash sales in the winter months, you will not be able to capture the full futures price carry offered in the deferred contracts (May or July).