How I Captured Market Carry On My Corn

Published on: 11:41AM Dec 09, 2019
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Market Commentary for 12/6/19

Beans

After 3 weeks of declining futures levels, beans rallied 20 cents this week. Plus, China announced they will remove some soybean tariffs, which would help prices if purchases follow.

Since farmers haven’t been selling much due to low future values, basis continues to get stronger. My local processor increased bids another 5 cents, totaling 35 cents since the end of October. 

Some are suggesting the slow harvest pace may be bullish.  However, looking back, this year’s harvest is only 1% behind last year’s pace at this point, and only 3% behind the last 5 year’s average.  Even if 1% is never harvested, that only represents 44 million lost bushels, or approximately 10% of the expected carryout.  With the projected carryout likely being the 2nd highest on record, it’s too early to know if prices would improve.  If export pace slows, this possible reduction may not matter.

Corn

Over the last 3 weeks corn has closed within a tight 6 cent trading range ($3.76-$3.82 on March futures) for all but one night.  While the US is competitively priced with Brazilian corn, competition from Ukraine is keeping the corn market in check.  It seems farmers don’t want to sell at these low values, so prices are stuck.

Harvest pace is slow, but it’s within 10% of the 5-year average.  That means there’s likely 1.4 billion bushels still in the fields.  It seems reasonable that half those bushels should get harvested before winter sets in.  The other 700 million bushels, that may not get harvested until spring, could have some yield loss.

Reports dating back 20 years show heavy snow can reduce yields by at least 50%.  However, I’ve talked to farmers who have left corn standing until spring that say they lost less than 5% most years.  Both outcomes seem extreme, so I think a 10-25% yield loss estimate is realistic, or 70-175 million lost bushels.  Its unlikely prices would be affected much by 70 million bushels, but 175 million could have some impact.  However, any extreme rally would likely reduce export sales too, so yield loss effects on prices may be minor.

In any event, the potential loss from grain still in fields isn’t bearish, but it’s not necessarily overly bullish either.

How I Captured Market Carry On My Corn

Last week I still had 20% of my 2019 production priced against December futures.  Since Dec futures are going to expire, I needed to move those sales forward to March futures and capture market carry.  On 11/25/19 I bought back the Dec sales and immediately sold March futures for 10.5 cents higher than what I bought the Dec futures back at. The value of the futures in the trade doesn’t matter, only the difference between the two futures. 

What Is Your Current Value Now On These Trades?

My sold December futures had an average price of $3.925 when all option premium and past rolling profits are added in.  By “rolling the sales” to March for another 10.5 cents (i.e. market carry), my trade now has a value of $4.03 against March futures.

Won’t Your Hedge Account Show A Sale At Current Futures Levels Instead Of The $4.03?

While the sale price in the hedge account will LOOK unappealing, this is the strategy used for capturing market carry.  If I don’t make the sale at the same time that I buy back the previous sales, I cross the line from being a hedger to a speculator.

I understand that farmers are hesitant to do this kind of trading.  For some it’s confusing because the hedge account won’t reflect what the actual position prices are in their account.  It requires a lot of book keeping to keep track of where I’m at with sales, and many farmers don’t want more paperwork.  However, for me the added premium I receive for very little added risk is worth the minor work.  It helps me sell at profitable levels during sideways markets.  Also, I’m not alone in doing this marketing strategy.  Almost all of the large grain handling companies make much of their income doing this exact type of trade.

Why Not Wait To Sell March Futures Once Prices Are Higher?

By immediately selling March futures I am a hedger without added risk.  Waiting for higher prices is speculative and risky because the market doesn’t always rally, and the farmer could eventually be worse off.  Why risk waiting when there is a guaranteed 10.5 cents on the table right now? There is no guarantee that prices will rally or that a farmer will even sell when the opportunity presents itself.

But What About Last Year?  Had Farmers Waited They Would Have Made More.

True, but the widespread planting delays of last year had never happened before.  Record and unexpected events are extremely hard to plan for, so waiting for rallies is risky. Prior to last spring, the market was sideways at unprofitable levels for over 8 months.  And even when prices rallied last spring, farmers thought prices would go even higher.  Many farmers waited to sell and missed out on all of the rally and still have nothing sold. 

Sitting on unpriced corn from a sale that I buy back and waiting for rallies in the future places a lot of risk on my operation.  Not only would I have to worry about selling this year’s grain, but I always have next years to sell too.

Why Only Roll to March?

I intend to core my bin centers in the next several months and these trades could be used for that course of action. I could still roll it to May or July eventually if the market conditions make sense. I might have been better off rolling the sale further forward in time now, but I won’t know that until the end of February. With the information I had today I felt this was the best futures contract to use to hold my sales.

Doesn’t It Cost To “Roll” Your Futures Forward?

Yes, it costs about 1 cent in commissions each time I roll.  For me, 1 cent is a small price to pay for the flexibility and profit potential this grain marketing strategy provides me.  I’m also going to wait and see what kind of basis appreciation the market provides me during this time as well.

There are so many advantages for farmers to take advantage of market carry profits.  For me, the extra time and book work is worth the added profit potential I receive for little added risk to my farm operation.

 

Want to read more by Jon Scheve?  Check out recent articles:

Sideways Markets Can Still Provide Profit Potential

Is It Possible For Beans To Trade Above $9.50 & Corn To Trade Above $4

The December Corn Basis - Is It A Good Level To Sell?

Don't Give Your Storage Away

Using Straddle Options Top Help Price Grain At Higher Values

Demand Obstacles Corn Must Overcome For A Price Rally

Re-Owning Corn Futures Or Options - The Pros And Cons Of Both

Should I Pay For Commercial Storage?

Which Is Better For On Farm Storage - Corn Or Beans

 

Jon Scheve
Superior Feed Ingredients, LLC
[email protected]
 
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