Jon Scheve with weekly market commentary made on December 15, 2023
The market continues to watch Brazil’s weather. Mato Grosso and northeastern Brazil are reporting hot and dry conditions. This area produces 40% of Brazil’s corn and could mean reduced yields. However, the most crucial reproductive development stage begins next week and lasts for nearly a month.
On the flip side, southern Brazil, which was dry last year, has received a lot of rain this year. The Rio Grande do Sul, Mato Grosso do Sul, and Parana regions, where nearly 40% of Brazil’s beans are grown, just finished planting. If favorable weather conditions continue, harvest yields should be good.
Market Action – Capturing Carry in the Corn Market
I built grain bins 15 years ago to store my entire corn crop during harvest for several reasons:
I did not want to wait in line during harvest at the local elevator or processor.
Local basis bids tend to be lowest during harvest, and I can usually increase my profits by holding grain and setting basis later in the year when local demand is higher.
It keeps me flexible and able to sell to any buyer with the best basis bid picked up on my farm.
I can dry my corn at a lower cost than what commercial facilities charge.
Since I know I will not ship corn out of my bins in October, November, or December, I need to “roll” any sales made against the December futures contract forward. As stated previously, 100% of my 2023 corn was priced on the December contract at what is essentially $5.54, including all my options premium. On November 29, I “rolled” these December sales to the May contract and collected 37 cents carry.
What Does This Mean?
I was short December futures in my hedge account at essentially $5.54. On November 29, I bought back December futures for $4.50 and sold May futures for $4.87 at the same time. This “roll” trade left me with a 37-cent market carry profit and a $4.87 sale on the May contract in my hedge account.
But The May Sale Is Lower Than Your Original Sale
Sometimes farmers get hung up on “rolls” because the new sale value is lower. Therefore, they think they have lost money, but they have not. Following is the math behind the trade:
$5.54 December futures sale - $4.50 futures buy back = $1.04 profit
$1.04 profit + $4.87 May sale = to a $5.91 May sale
An easier way to look at the trade is that since the spread trade had a 37-cent profit, a 37-cent carry premium was added to my original $5.54 December sale which is $5.54 + .37 = $5.91.
When Rolling Sales Forward, The Actual Trade Prices Do Not Matter
Only the spread between the values matter. So, even if the prices between December and May had been $6 and $6.37, the carry profit would still be 37 cents, and like I sold $5.91. Even though the market is higher.
This also illustrates why it is very important to keep detailed records of every trade in a hedge account during the marketing year. Without it, farmers can forget why the sales in their account are the values they are.
Why Did You Sell the May Contract at the Same Time? Why Not Wait for a Rally?
The short answer is that would have been a pure speculation play. The market was giving me a guaranteed 37-cent profit, and I took it. I already need a rally to help me get the next crop year sold at better values. I do not want to risk another crop at the same time.
I handle my stored grain, that is priced with futures, like elevators do. I keep the grain hedged, collect the carry, and minimize my risk. To use a baseball analogy, this strategy is like getting a base hit every time. I may not have a chance for a home run, but I also know I will not strike out waiting for a market rally that might not happen.
Factoring The Interest Cost to Hold My Grain
With all my grain priced on futures, I could just set the basis now, move the grain and collect my money. However, I think basis values could improve in the futures, so I want to hold my grain a little longer.
There is a cost to do this though. An operating loan interest cost to not sell my corn right now also needs to be factored and it is 3.56 cents per month. To calculate this, I use a 9% operating loan interest rate x $4.75 cash value corn / 12 months.
This means the 37-cent market carry covers my loan interest expense and commission charges until May. Even after interest is accounted for, I still have 19-cent guaranteed profit, while I wait for better basis values down the road (5 months waiting x 3.56 interest cost = 17.8 cents). Thus, 37 cents of carry – 17.8 cent interest costs mean I get paid 18 cents guaranteed to hold my grain until at least May waiting for basis improvement using the bank’s money.
Why Roll to the May Contract?
The spread to the July was not quite as profitable on a per month rate. The spread to March had a slight advantage to May, but after factoring commission charges to eventually roll from the March to the May the trade showed minimal risk/reward.
Moving forward, I will continue to watch for any spread or basis opportunity that would allow me to capture more profits. This could even mean moving my grain earlier or later than the April or May shipment times.
Did You Collect Carry On 100% Of Your Corn?
Yes, I had all my corn sold with December futures, so I collected 37 cents on 100% of my corn. Note, market carry premium can only be collected on grain that is already sold with futures and where basis is not yet set.
Recapping How Much I Sold My 2023 Corn Futures For
As stated, previous, through outright futures sales and puts to protect my downside I ended up with $5.37 futures in late November. I combined this with options trading strategies throughout the year to collect an additional 17 cents, which increased my corn futures sale value to the equivalent of $5.54 against the December contract. Now I just captured an additional 37 cents of market carry. This means I basically have sold $5.90 futures against the May contract after commissions.
With the May contract currently trading at $4.95, I feel very fortunate with my position. I did not hit the home run, but I certainly did not strike out either. A farmer with unpriced grain in the bin will need the May futures to rally over 95 cents in the next 5 months just to have the same opportunity that I have today.
If you would like to know more about this type of marketing strategy or the basis opportunities available in your local market for corn and soybeans reach out to me at jon@superiorfeed.com
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
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