There are many reasons to put up a grain bin. Flexibility in when and where grain is moved during harvest is a major consideration, as is time and labor management. If you’re going to use bins, take advantage of the flexibility they provide.
Years ago, end users adopted a “FedEx” attitude, also known as “just-in-time deliveries.” End users refused to be bogged down with inventory and its associated costs, so they encouraged farmers to store grain. That market structure was accelerated when ethanol production expanded in the Midwest, as ethanol facilities wanted no more than a 30-day supply on-site.
Eventually, the incentive to store overtook the futures market. Now, a carry market in corn is standard with later contract months, starting with the December corn contract, trading at a premium to the preceding contract month.
That premium reflects what end users are willing to pay for somebody to store what they will eventually need. A carry market was once viewed as a negative for price potential. Time, and 5 billion bushels of corn going to ethanol production, has quieted that market signal. A bull-spread market is a bullish market structure, reflecting robust demand compared to available supplies.
Capture the Carry
To bag the incentive to store, you must capture the carry, which means locking in the higher price that’s available for future delivery. Depending on basis prices, capturing carry can be done in either the cash or futures market. If basis for summer-month delivery is at or stronger than average, use a forward cash contract to lock in price and basis.
If summer-month delivery basis is weaker than average, lock in price with a hedge in the contract representing the delivery period in which you will move the physical commodity. (May contract for spring trucking; July contract for summer-month delivery).
If using a forward cash contract, you can reopen upside price potential with a long call option or long futures position. But because the corn was already sold in the cash market, basis remains locked.
With a hedge, upside price potential can be reopened by exiting the hedge or with a long call option.
Avoid Costly Mistakes
The biggest mistake growers make in a carry market is assuming if July futures are trading above $4 per bushel during harvest, prices will be above $4 in July. Prices move. There are no guarantees, unless you lock them in.
During harvest, the only way you can secure $4 corn in July is to capture the carry. In many years, capturing that carry will make a payment on the bin.
All episodes of “AgriTalk,” as well as other Farm Journal broadcasts, are available on demand via the “AgriTalk” app. Download the app for free on iOS and Android devices. Learn more at AgriTalk.com