Forward Curves Tell Hedgers to Sell Now

September 19, 2012 11:40 AM

Corn and soybean producers were advised Sept. 19 to increase cash sales of 2012-crop corn and soybeans. Fundamentals for both markets still feature the potential for even higher prices in the weeks (and months) ahead, but we’re sticking with some strict marketing rules in this piece of advice — especially for soybeans.

A ‘bear-spread market’ —

When supplies of corn and soybeans are adequate (or demand is slow... or both), the markets will give farmers incentive to put crops in the bin by offering higher prices for deferred delivery. That, however, doesn’t mean those “higher prices” are “high.” This pricing formation — with deferred prices above nearby contracts — is known as a “bear-spread market.” The message from this price structure is that end-users have plenty of supplies right now, but they are willing to offer a higher price later to cover your costs to store the crop.

As proven by the corn market in recent years, prices can rally in a bear-spread formation. This happens in a market that is building demand — specifically, increased corn demand for ethanol production. The fact that ethanol producers have been unwilling to build significant storage facilities also fueled the corn market’s ability to rally in a bear-spread formation. We called it the “ethanol-spread market.” Prices were “good” for nearby delivery, but ethanol producers were bidding up spring- and summer-month corn futures to encourage farmers to store corn at harvest to be delivered to them later.

A ‘bull-spread market’ —

When supplies of corn and soybeans are tight (or demand is strong... or both), the markets will give incentive to farmers to deliver crops at harvest by holding nearby futures above deferred contract prices. This price formation — with nearby prices above deferred futures — is known as a “bull-spread market.” The message from this price structure is to bring crops to the market now.

The name makes the price outlook clear —

As the name implies, the price outlook is typically bullish in a bull-spread market. That’s the case in both corn and soybeans. Forward curve charts plot the current value of each contract month on one line. The forward curve for corn shows flat prices out to May with a slight dip to the July contract. Prices then fall sharply to the September 2013 contract in anticipation that plenty of new-crop corn will again be harvested in August next year. The slide flattens out a bit to the traditional new-crop, December 2013 corn contract.

The forward curve for soybeans shows flat prices from November 2012 to January 2013 futures. After that, a steady decline is in place for two reasons:

1. The U.S. bean supply is tight and demand is strong.

2. Anticipation of a big South American crop with harvest getting
started in late-February or early March.

Both forward curves give hedgers incentive to sell —

Both markets are bull spread and the fundamentals suggest prices could continue to rise. Both markets are also offering the best pricing opportunities on the board to hedgers willing to deliver corn and soybeans straight off the combine.

Nonetheless, the potential for higher prices (and stronger basis) later will encourage hedgers to put some corn and soybeans in the bin this fall (as we’re advising for corn hedgers). And so will income management — a lot of 2011-crop corn was sold in 2012 and some farmers just don’t want any additional income this year. Logistics are another reason — there simply isn’t enough time to move every bushel from the combine to town during a busy harvest season.

And we are stressing that the market is telling hedgers to sell 2012 production now. That’s because farmers willing to use futures and/or options have the ability to reown corn or soybeans sold in the cash market with a long futures or long call option position later.

We also advised cash-only marketers to sell some additional corn and soybeans in the cash market, but we will hold some of 2012-crop production in the bin out of respect for bullish market fundamentals.


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