Market Commentary for 12/8/17
The markets continue to go nowhere. Corn exports are pacing slower than USDA estimates, but on the other hand, farmers aren't selling. Beans earlier this week seemingly had upside potential due to South American weather, but ultimately couldn't sustain it, as the week ended with little change. Beans still do have some potential in the short term, if there is a South American weather scare, but everything is still uncertain.
Don’t Give Your Storage Away
All too often farmers are overly focused on only cash prices, while paying little attention to their storage expenses. This is unfortunate because if farmers want bigger premiums and profits (especially when prices are at/under breakeven prices), its essential that storage expenses be considered as a part of the whole marketing plan. Generally speaking though, this goes against "conventional" wisdom and requires farmers to think a little differently. Following illustrates mistakes many farmers make who don't have 100% on-farm storage capacity.
Often farmers make their first (and maybe only) sale before harvest for Dec or Jan delivery to capture some market carry premium while also allowing them to core their bins during the winter (a seemingly win-win). This makes perfect sense for farmers with 100% on-farm storage, but for farmers who don't have full storage on their farm, it is usually a mistake.
For example, last summer corn prices for harvest delivery were $4.10 and Jan delivery was $4.20. This means there was a 10 cent market carry premium for a farmer to hold their grain after harvest for 2 months (i.e. 5 cents/month). Seeing this premium, farmers tend to then sell their corn they intend to store at home thinking this is a good deal. Fast forward to now (6 months later), corn is under $3.50, and since these farmers don't want to sell for that price, they pay storage fees at a commercial facility for likely 5 cents/month waiting for prices to increase.
Put another way, these farmers wiped away all market carry profits from the original trade on grain storage fees waiting for higher prices on stored corn in a commercial facility. Many farmers will easily wait for 6 months looking for a rally in prices while incurring 30 cents in storage fees. In the end these farmers are 20 cents behind (i.e. 10 cents profit on original market carry sale on the stored bushels, less the 30 cent 6 month storage fee on any unpriced grain in commercial storage).
Obviously I understand the need to core bins in the winter and I appreciate that farmers are trying to secure market carry with Jan delivery. However, a better marketing strategy would be to sell grain for harvest delivery on the original sale (last summer) and then consider more sales later. Realistically, farmers can really wait until Feb or even Mar to core bins, which allows for two free months of on-farm storage, more time for rally potential, and possibly even a basis bump. In other words.....by waiting.....farmers aren't "Giving Away Any Storage."
It's difficult for farmers without 100% on-farm storage to estimate their storage needs each year. That's why I suggest hedging with futures. This allows for flexibility in deciding when, where and how much grain the farmer wants/needs to move. Plus it leaves the option open to pick up market carry premium too. Flexibility in your grain marketing strategy, and sometimes “Going Against The Grain" will lead to increased profitability.
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
This email material is for the sole use of the intended recipient, and cannot be reproduced, disseminated, distributed or electronically transmitted, including any attachments, without the prior written permission of Superior Feed Ingredients, LLC.. Even though the information contained herein is believed to be reliable, we cannot guarantee its accuracy or completeness, and the views and opinions expressed are subject to change without notice. Trading commodities involves risk and one should fully understand those risks before buying or selling futures or options. This data is provided for information purposes only and is not intended to be used for specific trading strategies.