Outlook: You Shouldn't Store Unpriced Grain

September 21, 2016 05:45 AM

I’m just going to come out and say it: storing unpriced grain could be one of the biggest mistakes farmers make this year. Farmers will store corn and soybeans because of low flat prices, not because basis might narrow or to capture carry. I fear many farmers put a large part of their corn and soybean crop unpriced in the bin. They are taking all the risk of production and are hoping for future price recovery.

For this strategy to pan out, overall national yields must fail to exceed preharvest expectations (corn below 166 bu. and soybeans below 46 bu.) for the market to be worried about supply reduction affecting price. The other side of the equation is demand. It would need to exceed our expectations—but we already have very strong demand expectations factored into the market. I don’t see where additional demand could come from to rescue prices. 
If U.S. farmers end up storing until next summer, they could possibly net less than they have invested in the crop, compounding their financial stress.

Producers should take advantage of big carry incentive to store by selling carry. Remain open for some degree of basis improvement, but be realistic on the upside potential since so much inventory is expected to be stored. If anyone wants to be flat price long, formalize on paper a long position with a specific profit/loss objective. 

Buy a deep-in-the-money lead month call and pay a small time value cost rather than buy futures and have unlimited risk exposure. Under no circumstances would I suggest buying the deferred 2017 contracts with big carry simply to try to avoid making the decision when to roll lead-month contracts. There are ways to tweak the strategy by selling out-of-the-money calls and puts to enhance or reduce costs, but they are for more experienced marketers. This is not a time to be overly aggressive.

Learn from 2016 mistakes and try to improve performance for 2017 and beyond. Grain producers must decide how to improve their 2017 grain selling. This year proved again farmers have a hard time aggressively selling a supply-driven bull market caused by weather uncertainty. The only effective way is to create an artificial position of limited risk and unlimited reward. 

If December 2017 corn gets back to $4.20 to $4.40 and Novembers 2017 soybeans get to $11.50 to $12.50, sell all expected production. It is easy to say that when prices are considerably below price targets. 

The problem is, to get back to better price levels, we need to see a big reduction in domestic and global acres, greater demand, a weaker U.S. dollar, and a significant reaction to the change from El Niño to La Niña. If all of these factors came together, producers would not only pull all orders to sell, they would more than likely want to be net long all the expected 2016 and 2017 crops already priced. 

This is the worst thing to do as a marketer but exactly what speculators want. Do not make things so easy for them. Buy a low-cost option that allows you to sell December 2017 cash corn when December 2016 tests $3.90 to $4.40 and sell November 2017 cash soybeans when November 2017 tests $11 to $12. 

It is time to start making your 2017 and 2018 marketing plan rather than cleaning up 2015 and 2016 cash selling. I hope I can help farmers sell their crops for more than what it costs them to produce it, but when events occur, make sound financial decisions to improve your overall long-term financial outlook. I know you love farming; I share your feeling deeply. However, making a profit is necessary to survive and prosper long-term; simply hoping for it will not cut it.  

Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions. 

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Spell Check

Wanamingo, MN
9/21/2016 07:40 AM

  There is a difference between selling at harvest low and waiting till next summer. As always there is some seasonal rally in between these points to sell the crop. this usually occurs after farmers have given up on a price rally. It seems farmers sell the majority of their crop before the market is allowed to rally. Soybeans are pointing to higher prices than last year. Corn appears less robust.

Wisconsin Corn Grower
Kewaunee, WI
9/21/2016 08:24 AM

  It is easy to tell someone to sell corn when it is $1.20 below the cost of producing it especially when your not the one that is taking the loss. Even with the rally in June we were not at a break even price in my area. As far as the futures market being used as a place to hedge my grain those days came to an end when that market was opened up to the large speculative hedge funds ten years ago.

Greensburg, IN
9/21/2016 09:49 AM

  We all know that no markets sit idle for more than 6 months normally. We get opportunities EVERY year. Some at or above production cost while sometimes below. However with a 2.4 or a 2.3 or a 2.1 billion carryout the wait maybe longer than normal. Hearing more & more quality discussions. Higher than average damage corn normally doesn't store well. So sitting on that type of corn crop may backfire on you more than you expect (discounts) and worse case no one wanting it. So if you are lucky enough to have quality then sell the carry as MR. Utterback suggests, and go buy a July Call that fits your budget (cost). This is appears to be on of those years where bear market will once again sleep ALL winter...


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