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Sell The
Carry
by Ed Usset
Grain Marketing Specialist – University of Minnesota
The current big corn spread (carry) is just begging for corn to be sold.
Yes, some would deem this as a dull, low-risk way to put a little extra
money in your pocket on top of an already pretty good price – and not
have any more worries.
The side benefit of this move is you protect the value of your grain in
storage by selling the carry – and you can defer taxes from this year.
I like to follow the spread patterns in the market, and you can easily
see how the corn carry grew from 10 to 15¢ when the futures market
prices peaked in late June, to its current 40¢ carry today.
Go to ‘Corn Futures’ page on www.cbot.com, click on the
‘Spreads’ tab, find a listing for ‘08Dec to 09Jul’ and click on
the little chart symbol in the ‘Date’ column. Once there, select the
‘Weekly’ period, not daily, to view the pattern.
www.cbot.com
As 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 the 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” (www.cffm.umn.edu/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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When To
Sell
Not the gambler type, I continue to preach consistency
in grain marketing in my meetings with growers – because it works in
the long run. My objective is to get them to take a disciplined
postharvest approach, which can be aided by my simple fill-in-the-blank
marketing plan template, then “work the plan.”
In the current corn market, for example, I see a big carry, which tells
me to sell it. Looking at mid-October as an example, there was a 39¢
spread (carry) between December corn ($3.84) and July corn ($4.23).
Based on my decision tree, I put the grain in on-farm storage and sell
July futures. Given my local basis (difference between cash and futures
price, in southern Minnesota) which was 40 cents under (about $3.45), if
I sell July and can get basis of 25-30¢ under next March, April or May,
then I achieve a cash price around $3.95, and I could get another 50¢
just by selling the carry.
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Too Dull For
Some
The above pricing example, minus on-farm storage costs
(interest on your money) offers a good return. But that positive return
may be too dull for some people. But when I do that, I’m assured of
three things:- A premium over harvest price
- Delayed sales until next year for tax purposes
- I take away the downside risk.
I know this strategy takes away
an upside potential if the market rallies. I don’t care for the
alternative of selling grain and re-owning it with call options. It
sticks in my craw, the idea of selling low and buying high. In the last
20 years, that strategy has worked only twice, with last year being one
of the years. Growers can always point to exceptions, and last year, it
was exactly the right thing to do.
If you’re among those who don’t want to lose upside potential, then
take a diversified approach and sell some of your grain in this manner
and also put some bushels in the bin unpriced.
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Better
Alternative
Instead of selling grain and buying a call, I
recommend simply buying a put if you feel you must use options – but
it is costly. Consider the cost of a July put with July corn around
$4.20. It’ll cost you a mere 52¢/bu. for the right to sell July
futures.
Here is where I usually ask farmers to take a deep breath and think
about that cost relative to the value of corn today. If corn is at
$3.50, that 52¢ is 15% of the value of corn – just to gain wiggle
room on the upside.
Whatever strategy you take, my goal is to get farmers to bring
discipline to grain marketing; define what price and/or basis you are
waiting for, write it down, then act on that plan.
Listen to Usset expand on this topic at cornandsoybeandigest.com/consistency_counts_asgrow.
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