Few questions from our clients.
Roger, do you think the carry to March from Dec (corn) will get more than 7-8 cents as we work into harvest? Just curious if I should put an order in to roll my HTA's to March at 8 cents. Looking at spread chart between these two months it doesn't look like we have gotten any more than 8 cents of carry since before 2021. I am expecting a better basis in March -July. Thanks!
Get your order placed to roll from Dec to March at 8 cents. That is a heads-up question. I have been waiting for ten months for that spread to get to 9¾. I have been distracted in recent weeks and had not been thinking about it as often as I should have.
It will take an incredibly bearish crop production report and poor demand on the S&D on October 12th to get that spread to 10. I see very little (5%) chance that will happen.
As you noted, the spread was 8 cent maximum the first week of August (see chart below). Normally, as we approach harvest with normal yields, that spread (return to carry) will easily get to 11 or 12 cents and sometimes 13+ with good yields and relatively large carry-in. The USDA informed us on September 30th we do not have a large carry-in and I just do not see yields going to 178 bushels this year. Even if that 178 yield was reported, I doubt that spread will get to 10.
The market is telling us the Dec to March spread is not going to be 10 to 13 this year. The carry from March to May is just one cent and July corn is 5½ under the May… it is inverted. The market is telling us it will not pay anyone to store corn from March to July, so why would the market pay more than 8 cents to get from harvest to March?
The return to storage after December will not pay, but you are correct to expect substantial basis improvement into next spring.
Marketing question:
I have about 2/3 of my soybeans sold at a price I am very happy with. Well above 14 dollars and it locked in a good profit for me. My question is on the other 1/3, am I better off to sell at this lower price and buy them back using call options, or pay the 5 cents a month storage at the elevator? Grain bin storage is not an option. Thank you
Of those two choices, I would pay storage until mid-December to capture the basis appreciation from harvest to December and then switch to a July call option. Make sure your merchandiser will let you go from storage to sell beans and buy a call option before you do anything. Let’s look at the math to store versus sell now & buy a call.
If cash beans delivered now are worth $13.50 and you are paying 5% interest on operating loan, 5% times $13.50 = 67½ cents interest per bushel per year, which is 5.6 cents a month per bushel. Add the 5 cents a month commercial storage fee and your opportunity cost to own those beans is 10.6 cents per bushel per month, which is 26½ cents until the third week of December. That is a fixed cost. You will have to pay that cost whether the bean futures price goes up or down.
By the third week of December, the cash bean price will have gained 10 cents of carry (January futures price is 10 cents above November futures price) plus basis appreciation of 30 to 50 cents. Let’s say 40 cents. So, the net cash bean price to you on December 23rd will be 23½ cents more (50 cents carry & basis gain minus 26½ cents ownership cost) plus or minus the futures price change.
If you sell the beans now for $13.50 and take 55 cents of that money to buy an at-the-money January $13.80 call, you will maintain a long position in the bean futures market with the risk of loss limited to 55 cents.
If January beans are at $13.80 on expiration day (December 23rd):
The basis and carry would gain 23½ cents with no futures gain if stored.
The call option would expire worthless, losing 55 cents.
If January beans are at $14.00 on expiration day:
The basis and carry would gain 23½ cents plus 20 cents futures gain = 43½ cents if stored.
The call option would be worth 20 cents, losing 35 cents.
If January beans are at $15.00 on expiration day:
The basis and carry would gain 23½ cents plus $1.20 futures gain = $1.43½ gain if stored.
The call option would be worth $1.20, net profit of 65 cents (sell at $1.20 minus 55 cent cost).
If January beans are at $16.00 on expiration day:
The basis and carry would gain 23½ cents plus futures gain of $2.20 = $2.43½ gain if stored.
The call option will be worth $2.20 cents, net profit of $1.65.
If January beans are at $13.00 on expiration day:
The basis & carry would gain 23½ cents minus futures loss of 80 cents = 53½ cent loss if stored.
The call option will be worth nothing, losing 55 cents.
If January beans are at $12.00 on expiration day:
The basis and carry would gain 23½ cents minus futures loss of $1.80 = $1.56½ loss.
The call option will be worth nothing, losing 55 cents.
You did not ask, but I suggest you consider storing for two months then switch to a July basis contract or sell the cash beans in December and buy futures. Either of them will net you 10 cents more a month than storing with the same market risk.
The easy money is the basis appreciation from harvest to post harvest plus the 10 cents carry to January. Right now, there is another 20 cents of carry from January to July, but basis would have to firm 31 cents to breakeven on the storage.
Of course, if bean futures go up $3 by May or June, one would think storage would pay. Nope.
You would have $13.50 tied up waiting to make $3 and paying 10.6 cents per month to boot. You can sell the cash beans when storing no longer pays and use $1 as margin money to buy beans in the July futures.
Which is better:
turning $13.50 into $17.50 and paying 10.6 cents a month to do it or
turning $1.00 into $4 and paying interest on $1, a half cent a month?
If you do a basis contract in December, you probably would get 70% of the cash value and tie up $4 to earn another $3. Marketing decisions need to include money management.