Scheve: Maximizing Basis Profits By Hedging Corn
Jun 10, 2019
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Market Commentary for 6/7/19
While planting progress continued across wetter parts of the Midwest this week, it still seems unlikely much more than 90% of corn acres will eventually get planted by the end of June. The market rationed demand very quickly once July corn exceeded $4.20. Questions will continue throughout summer on how many acres were actually planted and what the potential yields will be.
Improving Basis Values
The widespread uncertainty in futures prices is helping to improve basis prices around the country. End users are planning for upcoming production issues this winter by raising bids now for both new and old crop.
But it seems that farmers aren't selling much new crop on this rally. Instead most are focused on pricing grain already moved to end users or sitting in commercial storage. Even farmers with on-farm storage are holding back some of their old crop, so they can use it against new crop sales that were already made before the rally, should they not get all their acres planted or if their yields are below normal. Plus, many farmers believe there is enormous upside potential yet for futures, so they are waiting to see where the market goes for some of their old and much of their new crop.
This has made procuring corn by end users difficult; therefore, June basis values are approaching the highest levels of the year. New crop basis values are creeping higher too, especially in the eastern states where end users are concerned about getting enough grain sourced.
The same thing happened during recent drought years (i.e. 2010 - 2012) when the corn supply was tight, basis values at end users across the country were quite high compared to the last 5 years when supply was more than adequate.
Market Action – Corn Basis Sale
At the end of April, I was approached by some end users 300 miles away desperately needing corn. The Missouri river valley flooding was preventing rail cars from reaching their usual destinations in Oklahoma and Arkansas, so end users there were looking for alternative locations to source their grain. They had to increase their basis to entice farmers to move corn during planting season. Since I use futures to hedge my grain, I can stay very flexible and move my grain to the highest bidder anytime and anywhere.
In the end I received -19 on July futures, picked up on my farm, which was better than any posted local bids when all freight costs were considered. This bid was also 23 cents better than what I received for my '17 crop last summer. So, while futures price may have been disappointing for the ’18 crop, I improved my overall sales by taking advantage of the best basis opportunity available to me.
I sold about 50% of my '18 production with this sale. I'm holding the rest of my '18 corn until after harvest because the carry in the market will more than cover my interest until late winter and I have plenty of storage capacity for the remainder of the ’18 crop and all of my ’19 crop. Plus, I think basis levels will be the same as they are now or maybe better after the new year. Obviously, there is some downside basis risk that I’m taking on by not setting basis at this time, but I've noticed the last few years that holding hedged grain as long as possible was the more profitable market strategy. The potential lack of corn supply from the ’19 crop could work to my advantage later this year.
Superior Feed Ingredients, LLC
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