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Corn Storage May Be Less Attractive

October 22, 2011

 Corn futures spreads show the cost of storage may not be as financially beneficial as it has in year's past.

 

The old saying goes, says Jerry Gulke, president of the Gulke Group, that a short crop has a long tail. So far this year, it may be looking like we have a short crop and farmers are reluctant to let it go.
 
Traditionally during harvest season, farmers have dealt with a wide basis and if they were going to sell on the cash market, they would have to suffer the consequences. Thus, the recent boost in storage capacity. Now, farmers appear to be putting corn in their bins, locking the doors and forgetting about it.
 
 
Ethanol markets have had a lot to do with this narrowing of the basis in recent years, creating local competition. But even where Gulke farms in northern Illinois, where ethanol plants aren’t prevalent, he’s seen a narrowing there.
 
"Even our basis in April for fall delivery was 45-47 cents under futures for delivery to the elevator. Yesterday it was 25 cents under for October delivery. So, we’ve gained 20 cents and most of that was in September but that was 75 cents ago," says Gulke.
 
Now the question turns to how long will this basis strength be around. Typically, Gulke says farmers tend to believe this strength will be around long term. But that may not always be the case.
 
 
"What happens though is once they buyer’s needs are full, and we get further into harvesting, suddenly the buyer isn’t as aggressive. He says we’ve got what we need, and the farmer has their corn in the bin and all of the sudden basis widens out again."
 
Gulke looks at the spreads between December contracts and the July contract to telegraph this. "We’ve made a lot of money over the years by carrying the difference from December to July because there was always too much corn and they paid you to carry it.
 
 
"Now they’re saying we want to give a disincentive to hold corn because we need it now. Now I’m looking at 15 cent carry to July."
 
When taking into the cost of commercial storage into account, this is not providing the financial incentive to pay for storage this year.
 
 

 

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