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Market Commentary 9/23/19
December corn hasn’t closed above $3.75 this past month and it’s only closed below $3.65 in 7 of the last 27 trading sessions. While frost concerns are fading, farmers are not selling, and it seems like sideways prices could continue.
Since July 30th, November beans have closed between $8.55 and $9.00. Trade deal hopes have helped beans trade off the lows, but there will need to be additional China bean purchases going forward to keep bean prices around $9.00
What to Store at Harvest
I have over 100% on-farm storage capacity, and I highly recommend most farmers should as well. 100% on-farm storage capacity allows for more low-risk ways to maximize profit potential, increased flexibility and simplified harvest storage decisions.
Still, many farmers are resistant to it and ask me how they should prioritize their crops with only partial on-farm storage. The following illustrates how I would analyze which crops to store first. Examples below are based upon the local market conditions of where my farm is located in southeast Nebraska.
Futures Values Don’t Matter When Deciding Which Crop Should Be Stored.
This runs contrary to what many farmers think. Futures values shouldn’t be considered because I can always sell my grain and then immediately re-own futures in a brokerage account and maintain nearly the same market downside risk and/or upside potential. In other words, the risk is almost the same if I have unpriced grain in a bin as having long futures position in my hedge account.
I know that some people will suggest re-ownership through options is a better way to do this, but that is a conversation about which risk management strategy is better. Both ways are trying to accomplish the same end goal of capturing upside potential in the market. That is NOT my focus with this newsletter.
Basis opportunity, market carry and operating note interest should have the largest impact on storage decisions.
Consideration #1 - Basis
Basis is the difference between the price on the CBOT and a local cash bid. Basis is constantly moving throughout the year, but historically it trends higher from harvest until summer. To understand how and why basis affects storage decisions, following provides real examples of bean and corn basis levels over the last 3 years near my farm.
These charts illustrate that by storing both beans and corn from harvest until summer increased basis profitability potential between 10-55 cents. However, in terms of selecting which crop is more profitable to store, basis levels favored corn in 2018 and beans in 2017, while neither had an advantage in 2016.
Consideration #2 - Market Carry
Market Carry is when the price of futures in the summer months are higher than the current month. In the last 4 years, July soybean futures were higher than November, and July corn was higher than December. Market carry can only be collected if the grain is already sold with the ability to store it until setting a basis and delivery at a later date. For the past 2 out of 3 years beans have had a larger carry than corn until the following summer.
Consideration #3 – Interest On My Operating Note
There is a cost to use the bank’s money and not pay the operating loan off. It’s based on the interest rate on my operation note against the cash value of grain I’m storing. Based upon a one-year operating loan interest rate of 5.5%, multiplied by the cash values of each crop at harvest, following shows the interest cost to store each crop per month based upon where prices were around September 20th of each year. Because the cash value of beans is significantly higher than corn the cost to hold beans in bin is always going to point to corn as the better choice.
Which Crop Is Better To Store?
Following analyzes the profit potential of storing beans and corn from harvest in October until July (about 10 months).
While corn has had an advantage over beans the past few years, there are some additional considerations to think about before deciding which crop to store this year.
The Trade War
A trade deal would make upside potential for bean basis possible; however, a trade resolution is looking more and more unlikely until after the 2020 elections. If the trade war continues, it’s unlikely basis potential would be better than the last year.
Carry Fluctuations During Harvest
The new storage charges adopted by the board of trade could allow for carry to widen for corn and beans. However, reduced corn acres, and possibly lower yields, in the eastern corn belt could tighten market carry post-harvest. Regardless, storage decisions need to be made now, based on what we know today. This could lead to the corn’s carry potential being slightly less than previous years. If the bean yield is not reduced, there is a chance the bean carry will be wider today’s, which could mean storing beans over corn for the first time in many years is the better decision.
Moisture Discounts
Many farmers start harvesting corn at 17%+ and dry it down, but very few harvest wet beans. So, the cost to dry corn needs to be considered too. There can be a major cost savings when drying the corn at home. Moisture discounts could be more than 15 cents and would further favor storing corn over beans. I’m also not against storing beans first during harvest and then unloading the bins to complete the corn harvest later, if the market dictates.
Income Needs & Bin Capacity
Sometimes end of the year income is necessary to offset expenses. More money can be generated by moving the same amount of bean bushels as to corn. With corn weighing 56 lbs and beans 60 lbs the same bin can hold about 7% more bushels of corn. Both items could mean a slight benefit to storing corn over beans.
Corn Is Usually My Preferred Crop to Store at Home
Generally speaking, I prefer to store corn over beans. But this year corn basis levels for harvest delivery are the highest since 2012. It would seem difficult for basis values next summer to exceed the values we saw this previous summer. So, corn’s upside basis potential this year could be a little less than last year. There will always be concern about the China trade war and the final yields for both crops, both issues will not really be known until after harvest is complete. This may be the year to store beans over corn.
The Cost to Carry Unpriced Futures
The above example assumes all futures are priced at harvest. This year most of the grain on the farm is unpriced. It could be more expensive to store corn over beans because the bean carry is larger. This is because, if a farmer stores the corn but sells the beans and uses a reownership strategy of any kind, a large market carry could be an added expense.
100% On-Farm Storage Makes Decisions Easy
This year deciding what to store looks to be the most difficult decision in years. Nobody knows what’s going to happen next in the market.
Its why I have been suggesting to farmers for years that they should work to have 100% on-farm storage capacity. It can be difficult to make the right choice in any given year. Storage allows farmers to take advantage of unknowns in the market, plus in a year where most producers do not have much of either crop sold yet, it provides some relief from paying commercial storage fees.
Want to read more by Jon Scheve? Check out recent articles:
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Jon Scheve
Superior Feed Ingredients, LLC
jon@superiorfeed.com
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