Photo caption: Loading Grain, Nicole Santangelo, PSU
Let’s begin with remembering I am looking at this from my market perspective in south eastern Pennsylvania. If you care to read of my thoughts, please, remember to adjust them for your local market especially being careful with your expected local basis movements throughout the year. Also, remember I have no bushels to market so I have no skin in the game.
My bias is that our individual cost-of-production has no impact on deciding to market a crop once it is harvested. There is nothing we can do to change the market. There is nothing we can do to shift production to another enterprise. We are stuck with the crop and can only deal with what the market does, and the market does not care. I will talk all day long during the pre-planting season about knowing your COP. This is not the time for that consideration. We have to work with what we are offered.
There are only three things we can do with uncommitted bushels at harvest; 1) sell off the combine, 2) put in storage un-priced, and 3) put in storage priced for later delivery. The challenges center on deciding which of these methods is most appropriate. Nothing is 100%. Nobody on earth can predict the future. Things change. However, we can look at what the market is telling us today and get a feel for how to market some of our 2017 crop. A key concept at this time of year is “carry.”
What is “carry”?
Carry is the price difference between a nearby contract month and another contract month. As an example only: December corn is 350 this morning and July is 379. This makes the carry $0.29. We must be careful and remember that carry is a bid by the market to pay you for storage. It is not a prediction of what the price will be in the future. To get the carry you must sell it.
Selling the carry.
In our above example: to get the $0.29, you must price the corn today for delivery against the July contract. This is where it gets complicated. You may use either cash or futures contracts. If you want the futures carry, you can either sell futures directly or sell a hedge-to-arrive (HTA) contract that leaves the basis unpriced. You can also use a cash forward contract for July delivery. Remember to account for your expected local basis movement. You do not always have to hold the cash grain until July. If you sold futures, you can deliver the corn and terminate the strategy any time the basis meets your expectations. If you sell a cash forward contract or HTA, you will probably not be allowed to deliver until the date on the contract. The only reason that you would sell the carry is to make a profit from storing grain. If you follow this strategy you have put priced grain in storage for later delivery.
If we have no storage, selling off the combine is the standard marketing strategy. This strategy also makes sense under some market conditions even if we do have adequate on-farm storage. Corn looks to be asking us to store the crop priced for later delivery this year. Soybeans may be a different story? The carry with beans is relatively small so not much of a payment to the storage enterprise. To decide whether to store or sell we must now decide in the futures price is “high”.
If we believe today’s futures price is “high” – the market wants us to sell at harvest. If we believe today’s futures price is not “high” the market wants us to put our beans in the bin un-priced.
When we have un-priced grain in storage price risk is still with us. Of course, we put the crop in the bin un-priced because we are convinced prices will increase. Two things concern me about this; 1) prices may not increase, and 2) in many cases, when prices do increase we still do not market bushels.
If we have un-priced grain in storage; I’m asking you two questions right now: 1) what price are you waiting for? and 2) how long are you willing to wait?
Interested in enhancing your understanding of markets and market strategies? You may want to put a few dates on your calendar and consider tuning in to a series of monthly video conferences. Extension will be reviewing these topics at 7:00pm on the first Tuesday of December through April. Addition details will follow.