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Outlook: Carry is Back in the Game

April 26, 2014
By: Bob Utterback, Farm Journal Columnist

Spring has sprung and farmers are wrapped up with the hectic pace of planting. Don’t get so distracted with planting activity, though, that you miss marketing opportunities.
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This time of year, the market is focused on supply. Will crops get planted on schedule? Will summer weather help or hinder production? How will prices adjust if we see excess or a reduction in supply? 

The uncertainty has allowed prices to rally, which could encourage a few more planted acres than projected in the March reports. Further, if we assume that the crop will get planted and we will have slightly less than trend-line yields, it is possible adequate stocks of corn will develop in the last half of 2014. 

My initial assumption is carryover will remain at more than 1.6 billion bushels for corn, and it is likely to increase rather than decrease. This means carry will be coming back into the corn complex.

Capturing carry is critical to improving your bottom line when selling expected 2015 inventory. At press time, the corn market has an inverted carrying charge structure. The September 2014 corn contract is premium to the December 2014 contract, and the December 2014 contract is pre-mium to the December 2015 contract. This is not a normal structure for the corn market.

Let’s assume September 2014 corn is sold at an average $5.10 for expected 2015 production. The best strategy would be to hold until close to expiration, then roll to December 2014 and finally to March 2014. I expect this rolling to net at least 15¢ above the rolling costs, bringing it to $5.25. Then roll from March 2015 contract to September 2015 and start the process all over again to end up in the March 2016 contract for another 15¢ gain. The end result is netting above $5.40 basis the March 2016 contract. At press time, the March 2016 contract was at $5.02, and the rolling strategy in this scenario would have resulted in a 38¢ boost in selling price. 

So, can farmers produce the 2015 crop, put it in the bin and beat the average $5.40 USDA projection for the next several years? It makes good business sense to lock up a solid profit and defend against possible weather markets rather than hope for the best.

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If planting is done by mid-May, the spring high will already be in place. A modest sell-off at the end of May is seasonally expected, and a final attempt to drive out the bear will come on June/July pollination concerns before the fall price decline.
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Dump old crop inventory sooner than later. Do not allow July corn to go below $5 before having all old crop inventory moved.

2014 crop. Focus on selling September corn at $5.10 and every 5¢ higher. Set a target to have 75% of production sold by the May supply and demand report. The final 25% of average production should be sold in late June to early July. Roll long puts into short futures or cash positions by early July to reduce time value cost.

2015 crop. Aggressively sell at least 10% of expected 2015 crop starting at $5.10 and scale-up selling every 5¢ higher. Farmers should have a solid 50% of expected production sold by the time the market reaches $5.25 or by mid-June, whichever comes first. If the risks are understood, it is possible to move to higher levels, but realize the need to roll into put positions when moving from the March 2015 contract to the September 2015 contract in early March of next year.

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I’m convinced an increase in soybean acreage will occur. Tightening of old crop supplies and fulfillment of Chinese purchases has driven up the old crop price, but we are seeing a solid increase in imported soybeans from South America. By late June to early July, the risk will turn decisively negative for new crop beans.

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FEATURED IN: Farm Journal - Late Spring 2014

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