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Market Commentary for 5/7/21
July corn futures closed higher during all but 2 of the last 15 trading sessions, for a total $1.40/bu increase. Corn hasn’t increased this quickly since late June 2012 during the drought, and it’s only been 53 weeks since the 11-year market low of $3. This week prices exceeded $7, which has only happened 3 times in history, with the latest being spring 2013.
Prices are high because of Chinese demand and continued dry weather in Brazil. US weather hasn’t even impacted the market yet. Despite another week of increased prices, most end users are staying profitable. This seems to indicate there is still more upside potential down the road.
Also, the new crop corn-to-bean ratio shifted dramatically to favor planting corn this year. The western corn belt has already made substantial planting progress; however, the eastern belt has been delayed by rain and the northwest is still quite dry. However, there is still plenty of time for eastern farmers to catch up and for it to rain in the northern states.
Market Action
Back in early December, I set basis on all the 2020 beans I produced at the best basis values seen near my farm in 6 years. While I set the basis level, I did NOT set any more of my futures prices at the time. Instead, as I sold the basis, I set the cash price and bought futures back in my hedge account. This allowed me to get paid for the cash crop and pay off my operating note. Plus, with the long position in my hedge account, I could still participate if the market rallied further, which at the time I thought was likely.
From a futures value movement perspective, the risk for holding cash grain in storage and holding a long futures position in my hedge account is the same. However, by setting my basis value, any risk or opportunity in that area is eliminated. Plus, I don’t have any more interest payments and storage quality risk is no longer a factor.
When I made the cash trade, I bought futures back in the January ’21 contract. At the time, I had 50% of my ’20 beans sold in January futures and the other half was still unpriced. This meant I was now long on 50% of my beans on January futures as the sales hedges were offset. Now, all I had to do was pick a time or price to sell the remaining futures positions back out.
By late December, when January contracts were about to enter the delivery period right before they expire, I rolled these positions forward because I suspected there was still upside market potential. I moved my position to the March contract and collected 1 cent of premium due to the January / March futures inverse spread at the time. Then again in late February, as March futures were about to enter the delivery period right before they expire, I rolled the contract again to the May contract. This cost me 1 cent due to the March / May spread being at a carry.
I considered selling the May futures if prices neared $15, but ultimately never placed an order. Instead, I waited to see how the market would react during the spring. In the second week of April, beans went from $13.80 to $16.00 in 14 days. Plus, May futures gained a lot on the July contract while US basis levels rallied significantly. This suggested significant bean shortages and even more futures rally potential was yet to come.
Consequently, on April 27th with only 2 days left to trade on the May contract before it entered the delivery period leading up to its expiration, I rolled my May long position to July futures for a 35-cent profit, due to the May/June futures spread inverse (i.e, May higher than July).
In the chart below the red X shows where I rolled my May futures to July compared to the available spread opportunity for the past couple months.
In this type of “roll” trade I simultaneously sell my May long futures positions at a higher value than where I buy back the July futures. This means my overall position doesn’t change, because I’m still long futures, just now in the July contract instead. The actual value that I buy and sell doesn’t matter either. I’m only concerned with the spread between the two contracts. This trade gives me 35 cents of additional profit that I can add to my final price I ultimately set my futures at on the remaining bushels I have left to price.
Looking Forward
With my long futures positions now in July contracts, I’ll need to decide when to sell before the end of June or face the possibility of having to roll my sale forward again. Like corn, bean prices have increased in 15 out of the last 19 trading days on the July contract for over a $2/bushel move. I hope July futures exceed current May Futures values, but it’s not guaranteed. Like many farmers, I wish I had a crystal ball to tell me where and when the top of the market will be.
Want to read more by Jon Scheve? Check out recent articles:
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Brazil Will Export As Much Corn As The United States With Only Half The Yield Size
Corn Prices Could Range Between $4-$8 While Beans Could Be $10-$16
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What Price Will Farmers Sell Their Remaining Unpriced Corn?
$6 Corn? $15 Beans? Hang On Tight Its Going To Be A Bumpy Ride
Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
