Joe Victor is a Business Development Specialist with Minneapolis Grain Exchange, Inc., where he monitors cash grain activity and cash grain opportunities. He provides marketing advice through this blog.
Sep 10, 2009
As the marketplace perception trend continues to suggest increasing crop size for both corn and soybeans, futures and cash prices are precipitously trending lower. For those producers which for the most part followed their 2009 marketing plan are likely sleeping well. Those producers which deviated from their marketing plan or may have been caught off guard with “extra yield” are asking what alternatives do I have with unprotected 2009 production.
If those extra bushels for corn and soybeans are competing for the same on farm storage, there are economic not emotional choices to be made. Allendale Inc’s research suggest, the decision tools required to solidify your alternative are as follows, know the spread in futures and cash values as well as your regional basis history.
For this example Allendale will direct your attention to the chart which will detail the seasonal corn basis for central Illinois. As you are able to view, for this particular region, as the initial corn harvest begins the corn basis typically is running at levels of 25 to 30 cents under the December corn futures. At this point and time fall delivered corn basis is averaging 25 cents under the Dec futures for a flat cash price of $2.84/bushel. The seasonal basis does show its first sign of measurable appreciation as the fall harvest begins to wind down moving to a level 15 cents under for an appreciation of 10 cents. By using a cash value of $2.84 cents per bushel and incorporating interest on our money as well as cost of storage and insurance on the value of the grain, we calculate the cost per bushel per month to store on farm at 2.9 cents. The November basis appreciation alone has covered nearly three months worth of storage cost.
Looking out further utilizing the 2.9 cents/bu/mth cost of carry we look at a Dec-March futures spread and find the market is paying 13.2 cents or 4.4 cents/bu/mth, Dec-May at 22.6 cents or 4.5 cents/bu/mth and Dec-July futures spread of 31.4 cents or 4.5 cents. Existing Dec futures hedges are likely to be rolled to the July futures. The futures spread is more than adequately covering the cost of carry. Looking forward to the month of February, we can see basis rally once again this time at a value of 15 cents under the March futures and then another smaller basis rally into March-April time frame of 16 cents under the May futures. Be aware of the seasonal dips and rallies with regards to the basis as a useful marketing tool.
Conversely the central Illinois soybean basis has not experienced the dips and rallies as the corn has. As you are able to view the central IL soybean basis has traditionally locked itself into a range of 20 under to near 0 basis into the June-July timeframe. Present fall delivered bids are running at about $9.20 with month of Jan delivery running at $9.35 per bushel for a flat price gain of 15 cents. The cost of carry on $9.20 soybeans is 6.1cents/bu/mth. The 15 cents flat cash carry is used in two and a half months. The futures spread between Nov-Jan at 7.2 cents and suggest a loss of 5 cents for the time frame in question. The bottom-line is the lack of futures carry and basis appreciation suggest you may be better off to store the corn and move soybeans to the market. For those presently storing wheat, we can work through the same examples as above and suggest to you, the outlook is more positive to store wheat and corn but not the soybeans. If you are convinced soybean prices may rally you may choose to use a long options position, similar to a guaranteed minimum price contract.
What are your thoughts with regards to your marketing plans? Do you track and utilize basis and spreads?
We welcome your questions and comments.........Joe Victor
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