Size Up Your Storage Strategy

September 21, 2018 03:48 AM
 
Grain bins

Q: One of the big questions this fall is how best to use on-farm storage. Which crop should you store? Also, what are your thoughts on prices moving into the winter? Will we see a resolution to the Chinese tariff situation this calendar year?

Capture the Carry in Corn and Soybeans

noneAlan Brugler

President, Brugler Marketing & Management
alanb@bruglermktg.com

Both futures markets are providing carry as the market attempts to spread big crops over time. As of mid-September, the carry is larger for soybeans versus corn. Thus, putting soybeans in the bin and hedging it suggests a better return.

The cash basis for soybeans is much worse than for corn, with the national average for the latter 2¢ stronger than a year ago. Bean basis is likely to remain weak due to burdensome stocks, but there is more potential for basis improvement in beans.

I am more bullish on corn fundamentals, seeing a window of three to four months where the U.S. will be the major source of corn. Soy stocks will stay abundant. But, short covering in beans could be $1 per bushel and only 30¢ to 40¢ in corn. 

The Chinese economy is export dependent and if they lose the U.S. market due to additional U.S. tariffs, it will damage their GDP and banking system. They might try to wait out the mid-term elections and hope President Donald Trump is in a weakened position. Chinese efforts to substitute other oilseeds/meals don’t change the world oilseed balance sheet, they just move the chairs around. Crush margins would allow China to buy U.S. soybeans, with the 25% tariffs in place, if U.S. futures prices are below $8.25, subject to basis.

 

Manage Price Risk at Harvest

Mark GoldMark Gold
Managing Partner, Top Third Ag Marketing
mgold@topthird.com

With this year’s abundant crops, farmers will have to make decisions on whether to store grain or sell it. At these low prices and with weak basis, farmers will most likely do what they usually do—stick the grain in the bin and hope for higher prices in the spring.

The tough decision: Which commodity do you store? If you store beans, you are hoping for a settlement to the Chinese trade war to rally prices. If you store corn, you are hoping for stronger demand. Storing beans with a potential 850-million-bushel carryout is risky. Without an end to the trade war, futures prices could easily break 80¢ from current levels. If production in corn is larger than expected, and the U.S. dollar stays strong, there is a 50¢ risk in corn. I don’t like to play a guessing game with my clients. I like to manage risk.

My suggestion: If your basis in either commodity is decent, sell the grain. Once you sell the grain, I would buy call options to keep the upside open, if there is a rally.

If your basis is weak, and you have on-farm storage, you can store. But I would look to buy a put option to protect you from falling prices. If the market rallies you will lose the premium on the put option, but you might be able to sell your grain at higher prices and a better basis.

 

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 that the advice we give will result in profitable trades.

 

 

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