The Grain Hedge Team provides a macro-focused daily view of the world’s grain markets. Kevin McNew received a bachelor’s degree from Oklahoma State University and his master’s and Ph.D. degrees in Economics from North Carolina State University. He spent 10 years as a Professor of Economics with the University of Maryland and Montana State University focusing on commodity markets and is widely regarded for his ability to boil-down complex economic situations into easy-to-understand concepts for applied life.
Trading Tips in a Gloom and Doom Market
Jan 22, 2009
Being in Chicago at this year’s Top Producer Conference is diametrically different from last year. In January 2008, analysts couldn’t stop singing the praises of ethanol, the booming economy and the unrelenting demand for ag commodities. This year, the same analysts again sang in unison, but this time with an extremely somber pitch. The economy is devastated, ethanol is in the tank and let’s just hope your children live to see the economic turnaround.
So, with slim to no chance of $8 corn or $15 soybeans, honing your marketing skills will be that more important for financial success. At this year’s Top Producer Conference, Cash Grain Bids and its sister company GoGrain presented strategies and tips to help farmers get extra cents from their marketing. Here’s what we came up with
(1) New-Crop Futures – More than Just Fireworks on July 4th! Markets tend to move dramatically after the pro-longed July 4th holiday, digesting the weather patterns during this critical development stage. However, the likelihood of a sharp rally beyond July the 4th, while possible, is not a safe bet. On average over the last 10-year or 20-year period, new-crop corn and soybean futures decline after July 4th by approximately 30 to 40 cents a bushel. In other words, get your hedges on before you watch the fireworks!
(2) Know When to Roll’em! Corn and bean futures have a peculiar tendency to see delivery months narrow as we reach expiration of a contract. For example, over the last 10 years, the July-to-May spread falls by 2 cents a bushel from mid-April until the end of April. Perhaps a reflection of specs rolling positions or commercials adjusting their hedges. But whatever the cause, as a hedger who may need to roll hedges you want to make sure and do your rolling mid-Month before the expiration and roll-factor hits. It can save 2 to 4 cents on average across corn and beans. If you happen to be re-owning on paper with futures ad need to roll, the opposite applies that you want to do it as close to the end of the month as possible.
(3) Basis Forward Contracting – Proceed with Caution. We’ve just seen that it is to your advantage to get futures prices established before harvest, but does the same hold true for basis? In other words, should you be forward contracting on harvest basis in the spring or summer during the growing season? To answer this question we examined new-crop basis quotes from select elevators in IA & IL for the last 10 years and compared this to the basis at harvest time. On average, new-crop corn basis is 8 cents a bushel weaker in July then it is at harvest, while soybean basis is 16 cents weaker. So, while you may hit the seasonal high for futures in July, chances are this is the worst time to lock-in a new-crop basis. As such, separating out your futures and basis transactions will help you better hit the peaks of these two distinct trends!
For more tips or to download the full presentation go HERE