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Not Bearish
Yet
by Ed Usset
Grain Marketing Specialist – University of Minnesota
We all know corn prices have taken a jaw-dropping plummet since early
July. Early conventional thinking was: Okay, the first buck down was no
big deal, since we were overbought. Then the next dollar drop was merely
shaking out the weak longs – setting us up for a good rally.
But then, we lost another buck to buck-and-a-half in corn. Now it’s
serious and people are saying, “What is this? Are we done yet? Is this
the start of a bear market?”
I’m not a believer in the bear yet, since there’s too much
ethanol demand in the marketplace. But I digress from my real grain
marketing approach.
As a University of Minnesota grain marketing specialist, I have spent
more time listening to growers than doling out an upcoming market
outlook. I do that because I think growers need to start their marketing
with a different approach; one that doesn’t begin with market
outlook.
Listening to producers, I have learned that very few had a plan to
improve their marketing results. So now I talk to them about minimizing
or eliminating mistakes made in grain marketing, which is one aspect I
write about in my book “Grain Marketing is
Simple”.
Read on to learn more about my simple approach…and there’s a video
at the end of this newsletter where I talk through this approach to
grain marketing.
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Postharvest Marketing
Challenge
While preharvest marketing plans change little from
year to year, postharvest plans can and must change every year. To me,
postharvest marketing is all about understanding carrying charges –
what they tell me about the market and how I should react.
But first, let’s look at postharvest seasonality of cash and futures
prices and basis.
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Price Patterns After
Harvest
To no one’s surprise, on average, cash grain prices
are lowest at harvest and rise in the spring. Many producers believe
futures prices have the same tendency, but the evidence is not there for
corn and spring wheat. Future’s price direction after harvest is a
coin flip.
For example, in my book, “Grain Marketing is Simple,” I analyze July
futures price changes from harvest to the following spring (Oct. 15 to
May 15) over the last 18 years.
For corn, the market declined in 10 of those 18 years. For soybeans, the
market increased 13 out of 18 years from autumn to spring. And results
in wheat mirrored corn – declines in 10 of 18 years.
Averages, of course, can be deceiving, and there are exceptions just as
there is great price volatility from one year to the next. For the cash
market, a narrowing basis is clearly the primary driver behind rising
prices in corn. But futures prices are a wild card.
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Carrying Charges And Selling
The Carry
A basic carrying charge (difference in price between
futures delivery months) rule of thumb is that large grain supplies
equal large carrying charges and low prices. Large carrying charges tell
us that the market doesn’t need grain today, but will pay a premium
for grain later.
The opposite of this (inverted market) where future prices are lower
means your grain is wanted today, not in the future. And more often than
not, we ought to do what the market wants us to do.
Selling the carry demands a view of the whole market – futures and
cash. If the carry is large enough in both markets, then sell the carry
using a forward contract, selling futures or a hedge-to-arrive (HTA)
contract. Your opinion of basis will determine which tool works best.
One example, from early September, the CBOT had a large corn carry of
41¢ (December corn was $5.62 and July was $6.03), so selling the carry
may offer a better result and less risk. But in soybeans, the opposite
was true. There was a 45¢ carry (November beans $12.52 and July
$12.97), which isn’t big enough due to storage costs, but at least it
is positive.
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Storage
Costs
Know your on-farm costs, because it’s difficult to
make commercial storage work over the long haul at 4¢/bu./month.
The most important on-farm storage costs are variable costs, with
interest expense and in-and-out handling (shrink, damage) costs being
the most important variables (unless you have fixed costs on bin loans,
as well). North Dakota State University studies estimate in-and-out
costs at 8¢/bu. for corn and wheat and 11¢ for soybeans.
If your operation has debt and pays commercial storage rates, it is
difficult to make the case for storing unpriced grain or selling the
carry.
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