The Challenge Of Marketing With Large Ending Stocks

The Challenge Of Marketing With Large Ending Stocks

Marketing this year's corn and soybeans is a greater challenge with large ending stocks projected.

By Steve Johnson

EDITOR'S NOTE: Steve Johnson is an Iowa State University Extension farm management specialist. Contact him at 515-957-5790 or [email protected].

Should I sell some corn and soybeans now or store and wait for better prices later? Maybe I should sell the carry in the futures market, store and wait for better basis opportunities? The marketing alternatives are more limited this winter with large U.S. ending stocks for both corn and soybeans.

PLAYING THE GAME: The Iowa Commodity Challenge helps you learn how to use grain marketing tools without risking "real money." Farmers are encouraged to "take the challenge." It's an online simulation providing participants with knowledge to improve their strategies for selling cash corn and soybeans, as well as learning how to use futures.

Using the line graph above, compare the ending stocks as a percent of total crop use for the past five years. Are you looking for comparable years for that high of percentage? You would have to go back to the 2004-2005 crop year for corn and the 2006-2007 crop year for soybeans. It will likely take more than a few months, maybe a couple years of good demand for U.S. corn and soybeans, followed by global weather problems to reduce these large ending stocks.

Marketing vs. storage decisions for 2014 crop
In early October, nearby corn and soybean futures prices fell to four-year lows, before rebounding. By late-November, a great number of bushels are now sitting in storage, both on farm and commercially, with no price or basis protection.

For many farms, cash flow and storage costs are two important considerations. If you need cash, selling some bushels meets that need, despite the fact that you're selling at much lower prices than was likely budgeted for 2014. The large farm yields will make up for a portion of this revenue decline. Many farmers will likely need to align their cash flow needs this winter with old crop sales.

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Other farms may be putting bushels under the Commodity Credit Corporation (CCC) loan program. This is not a marketing plan, just access to cheaper interest and cash flow at their county marketing loan rate. This simply postpones the need to market those bushels for up to nine months. This might expose those bushels to even lower prices should futures prices not increase significantly by summer.

Cost of storing grain needs to be considered
Calculate your own storage costs. It likely costs less to store corn or soybeans on-farm versus commercial. The line graphs below compare $3.50 per bushel corn stored with 5% interest accruing monthly and costs reported quarterly. The 20 cents per bushel reflects the initial handling costs whether stored on-farm or in commercial storage.

How much will price need to rise to cover cost of storing?
By April, a farmer will need the cash price to increase by more than additional 42 cents per bu. on-farm or 54 cents per bu. for commercial storage. No one knows when and by how much the futures prices might rally or if basis will improve by the spring and summer months.

With the volume of corn and soybeans being stored this fall and winter, a large number of bushels will be available to the market. The local basis at the elevators/co-ops may remain fairly wide until spring. This is especially true in the Corn Belt where corn is being stored outside temporarily in flat storage. The processors and feed mills will likely narrow their basis to attract deliveries early this winter. By late winter, those corn bushels in flat storage will put pressure on local basis as they will need to be moved.

Selling corn: the carry in the corn market is larger now
Carrying charges are the futures price differences between the delivery months (e.g., December 2014 to July 2015). Carries in the corn market are larger than in recent years. For example, the July 2015 corn contract has been trading at a 30-cent premium to the nearby December 2014 contract.

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If you don't need cash until the spring or summer months, and have on-farm storage available, you might consider selling the corn carry of 30 cents per bushel. By selling for spring or summer delivery, and storing the grain, this is called "selling the carry" which seems attractive for corn stored on-farm with lower costs.

The futures price carry in the soybean market—January to July—is currently running about 19 cents per bushel. Thus, this strategy is likely limited for soybeans and commercially stored corn because of the cost of storage and limited futures price carry.

Other crop marketing tools—check them out!
While selling the futures price carry is a better prescription for recovering on-farm storage costs, it doesn't reflect all the risks of basis and costs of keeping the stored grain in good condition until delivery.

Most farms put their grain in storage and hope for a very big rally in futures prices and better basis opportunities. A couple more strategies a farmer might consider is to sell cash bushels this winter on an attractive basis bid. Then replace those bushels with a call option using the May or July futures contracts.

Talk to your grain merchandiser about how these minimum price contracts can eliminate storage costs, generate cash yet an leave upside for price potential.

What about using a basis contract—how does that work?
Another marketing tool is a basis contract. The farmer sells some cash bushels and the grain merchandiser replaces these bushels with a long-futures position, say the May or July corn contract.

The farmer receives 70% to 80% of the value of the cash crop. Since the farmer will be "long futures," the balance of the cash funds are held by the merchandiser should futures prices move lower. If futures prices rally, then the farmer gets the full cash value of those bushels, plus benefits nearly penny-for-penny with the higher futures price.

You are encouraged to take The Iowa Commodity Challenge
Iowa State University Extension and Outreach has teamed with the Iowa Farm Bureau Federation for the past five years to provide the Iowa Commodity Challenge, an online market simulation game.

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The 2014-2015 game and training materials are free and have been posted online. The game gives users the opportunity to learn firsthand how to use various crop marketing tools and improve your marketing strategies without writing a check.

Learn how to market grain without risk of losing real money
You can sell cash corn and or soybeans, in addition to using both futures and options to manage futures price risk. The 2014-2015 Iowa Commodity Challenge uses the March corn and soybean futures contracts, and participants have until March 11 to conclude their winter marketing strategies using a variety of marketing tools. You are encouraged to sign up and start playing this grain marketing game as soon as possible.

A 63-page Marketing Tools Workbook is available as a PDF for review, as well as 10 recorded webcasts and handouts that match. To learn more about the Iowa Commodity Challenge, visit: www.extension.iastate.edu/agdm/info/icc.html.

For farm management information and analysis visit ISU's Ag Decision Maker site at www.extension.iastate.edu/agdm; ISU farm management specialist Steve Johnson's site is at www.extension.iastate.edu/polk/farm-management.

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