Marketing –Understanding Carry (continued)
Posted: August 26, 2014
At harvest (which is rapidly approaching the eastern corn belt) grain producers only have three choices of what to do with their crops that have not yet been committed; 1) set a price and store for later delivery, 2) sell off the combine, and 3) store un-priced. Remember, carry is a signal from the market on what might be considered an appropriate marketing strategy, a large carry suggests setting a price and storing, while a small carry suggests either selling off the combine or storing un-priced.
This week’s discussion continues our look at the concept of “carry” in a post-harvest market. We will use the 2013 crop marketing year as a real-life example. These examples come directly from the farmer-to-farmer conversations we had during this past winter Grain Marketing Discussion Group series. This specific example comes from the markets available to grain producers in the Christiana, Chester County area.
This is simply an example of the concepts!
December 11, 2013 prices:
- Local buyers offered $4.60 for 2014 corn delivered at harvest.
- The futures market offered $4.67 for DEC 2014 (harvest) corn.
We did the math and found a large carry.
We’re probably all comfortable with selling to our normal buyers, so let’s just look now at the results from selling a futures contract as one method to capture carry:
Step 1: call CME broker to make a sale at $ 4.67 on new crop grain we have in the bin.
Step 2: call CME broker to buy futures back & sell the cash (we do these two tasks simultaneously)
We are now done marketing these bushels. Let’s examine the outcome.
DEC corn traded well above the price we established our hedge at so we did owe our broker some margin money in late winter and early spring that amounted to roughly $2,200.00 which was returned to our account in late spring and all summer as the market softened.
- We sold corn for $4.67 (our futures position price) in December.
- Today we bought that corn back for $3.67 making $1.00/bu. (we are ignoring our broker fee here).
- Simultaneously we sell the protected bushels to our local buyer for today’s price of $3.80.
- We now add the two marketing moves together to find the net result:
$3.80 cash plus $1.00 from our hedge = $4.80/bu. for those 2014 bushels we protected back in December, 2013.
Of course, there are lots of details not included in the simple illustration above, but it might get us thinking about the methods we can use to price the grain we have not yet priced, and it might get us thinking about participating in the winter Grain Marketing Discussion Group series coming up.