Head to Head: Does Storage Make Sense?

October 28, 2015 02:31 AM
 
Head to Head: Does Storage Make Sense?

Q: The weather has largely cooperated during this harvest season, and producers are rapidly gathering this year’s crops. With so much on-farm storage available, producers will be tempted to shut the bin doors tight and wait for better pricing opportunities. Please provide your opinion on storage of the 2015 inventory and if this is a strategy you would endorse. Is there a crop you might be more inclined to price and re-own on paper? 

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Joe Vaclavik
President, Standard Grain, Inc.
jvac@standardgrain.com

Local Demand Should Guide Use Of Bins

In general, storage should be used as a means to take advantage of carry in the market, or perhaps to solve a logistical limitation. Storage should not be used as a vehicle for speculation. The “hold and hope” strategy is dangerous; some sort of risk management strategy is advisable for unpriced or unprotected grain.  

Row-crop markets have consolidated in recent months, making options more affordable. Put options can be utilized to protect grain that will be stored, while call options can be utilized to re-own grain that has been priced out of the field. Defining the risk on one’s individual operation is the name of the game. 

Remember your farm has its own set of numbers and its own unique operating margins. What is best for your neighbor’s operation may not be what is best for yours.

Deciding which crop to store depends a great deal on local markets. 

Although the corn market currently offers better carry than the soybean market on the futures board, the cash market might be a different story. In many cases, the crop with the better carry in the cash market is likely the better choice for storage.
 

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Mike Florez 
Owner, Florez Marketing
floreztrading@gmail.com

Grain Signals Suggest Sales Should Proceed

As I look at the current pricing of the board, there isn’t a lot of reason to store anything. It is telling you to sell now and be done with the crop. I have heard from my clients that, overall, corn yields are below what they had expected earlier in the season and soybean yields are above what they expected. 

That leads me to think the corn market can continue to rally to match the $4.15 revenue insurance price. Soybeans are probably going to struggle with $9. 

Looking at the longer-term technical structure of the market, I think 2016 will mark the bottom of this multi-year bear market in grains. I would look for the month of February as possibly being a time of a low. Corn should be the upside leader, so if you sell your corn crop, I would buy either options or futures to capture any market gains. I would wait to buy anything in the soybean market. 

Be aware of outside influences, such as a sharp move up in the dollar. This could adversely affect grain prices. And, of course, have one eye on weather conditions in South America, as that could have a big impact 
on grain prices.

Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades.

 

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