Watch for seasonal price movements to capture strong basis opportunities
Like most farmers, Indiana’s Matt Sims can’t store his entire crop each year. In fact, he can only store 20% of his average corn crop.
When he does that, he has no space left for soybeans. Although he’d like to build more storage, it’s not in the budget for the near future. The upside? His existing storage capacity makes him an active marketer.
“The day my grain goes into the bin, it already has been sold for future delivery or has a floor under it with a put option,” says Sims, general manager of State Line Farms, a 4,600-acre operation in State Line, Ind. “We can capture the carry and get a better basis. I’ll watch the local market and see who needs corn.”
This is the mindset farmers need to adopt to make storage pay in 2017, experts say.
Market Basics. In October, USDA forecasted record 2016 crops with corn at 15.06 billion bushels and soybeans at 4.27 billion bushels.
“We’re going to end up with a shortage of space for both corn and soybeans,” says Ray Jenkins, Iowa State University Extension grain market educator. “The good news is we’re seeing strong export pull and strong seasonal demand for corn. The futures market has a reasonably good carry built into it.”
To be successful in an environment with high grain inventories, farmers should develop a written marketing plan with price and date goals, says Jessica Groskopf, University of Nebraska Extension educator for agricultural economics.
“It is not enough to think about it,” she says. “You have to write it down and have some sort of reminder system so you will actually pull the trigger.”
A solid understanding of three marketing basics—basis, carry and cost of ownership—is vital, says Steve Johnson, farm management specialist with Iowa State. He offers these definitions:
- Basis: The difference between the local cash price and the underlying futures price of a commodity. It reflects the local supply and demand for grain.
- Carry: The difference in price you will capture by selling one of the deferred futures month as compared to one of the nearby futures contract.
- Cost of ownership: The fixed and variable costs you will incur with storage. Include drying, insurance, interest expenses and opportunity cost.
“Successful farmers aren’t just trying to outguess the market,” Johnson says. “The key is market discipline and aligning cash-flow needs with their marketing plans.”
Seasonal Swings. Futures prices for both old- and new-crop corn and soybeans tend to rally annually between April and June about 90% of the time, Johnson points out. Finishing old-crop sales and making new crop sales is warranted nearly every spring. Many of these new crop bushels are likely delivered at harvest (see chart below).
What Does It Mean To Me?
• Manage around available storage to capture carry and better basis.
• Create a detailed marketing plan including expenses, cash flow and insurance.
• Seek to sell at off-peak times when elevators need extra grain inventory.
With tight farmer cash flows, despite record production, farmers should factor in demand and not ignore pricing opportunities for the remainder of 2016, especially during the last six weeks of the calendar year, Jenkins adds.
“The business model for grain processing facilities is to run at 100% capacity every day of the year that’s possible,” says Jenkins, who spent the past 25 years as a grain merchandiser. “I’ve seen many years where, on Nov. 5, you were swimming in corn, and by Nov. 20 you had raised your bids substantially.”
Stay In The Game. In part, that’s because farmers are finishing up harvest and completing fall fieldwork instead of switching gears to grain sales. Combine that factor with two three-day holiday weekends in December and Johnson thinks farmers can cash in on some attractive bids in the months ahead.
“With these processors running 24/7, they’ll need excessive amounts of grain those few days before they go down for Christmas and New Year’s,” he says. “The bids during the second half of December will likely be very attractive.”
You must understand your area’s demand picture, Jenkins says. To do so, regularly track local basis bids.
“Pick one day a week where you write down the basis levels for two to five of the market locations that are logistically attractive and influence the basis in your area,” he suggests. “Over time, you’ll get the flavor of what the various markets do and how their bids fluctuate.”
Groskopf reminds farmers it’s important to actively update and execute their marketing plans
and remain positive.
“You can’t get discouraged by where prices are at,” she says. “I know that is really hard when you’re looking at prices below or around your breakeven. It is easy to say you’re not going to do anything. There could be some really big consequences to not being proactive in this kind of market.”
Use tools such as the Pro Farmer Marketing Education Series and hear the latest in market analysis at events such as Top Producer Seminar from Jan. 24-27 in Chicago. Learn more at shopfarmjournal.com.
Farmers Sell Big Chunks of Grain Inventory in Just a Few Months, Data Show
The Importance of a Plan
To be proactive and diligent in pricing stored grain, you should develop a detailed marketing plan, recommends Steve Johnson, farm management specialist at Iowa State University Extension. He suggests incorporating the following elements into your written sales strategy:
- Cost of production estimates for the 2016 crop
- Realistic cash-flow needs and timelines
- On-farm versus commercial storage costs and considerations
- Stringent time objectives, as well as futures and cash price goals
- A basic understanding of a variety of commodity-marketing tools
For more resources, marketing tools and instructional videos from Iowa State Extension, visit http://tinyurl.com/iacrops.