Ed Usset will bring these characters to life in his presentation at the upcoming Farm Futures Business Summit, Jan. 20-21 at Iowa City. Register now at www.farmfuturessummit.com.
Like May and Sally, Earl places his crop into storage on the farm. He asks a question, “What is the carry in the market?” His pricing choice is based on the answer. If carrying charges are large, he sells the July contract and unwinds the hedge in late spring (just like Sally). If carrying charges are small, he holds the grain unpriced until the end of May (just like May Sellers).
Earl’s choice makes sense if you consider what the market is telling him—through the structure of the carrying charges—at harvest. Carrying charges are large when free grain supplies are ample to meet current demand. The prospects for higher prices in this environment are not great. Earl chooses to follow Sally with a hedging strategy that locks in a favorable return to storage and removes the risk of lower cash prices.
Small carrying charges (or an inverted market) indicate a tighter supply/demand balance. If this situation continues, the prospects for higher prices in the months ahead are better. Earl recognizes these better price prospects and chooses to follow May, and her tactic of holding unpriced grain in storage, with the hope of selling at higher prices in the spring.
Earl’s results are compared to Barney Binless in the following table. Earl’s results are net of variable storage costs and, like May and Sally, he is limited to holding 80% of his grain in on-farm storage. The remaining 20% is sold at harvest, at Barney’s harvest price.
Cash prices are based on average Iowa prices gathered and reported by USDA AMS Grain Market News and summarized by the Iowa Department of Agriculture and Land Stewardship
The carrying charge is deemed large if the Dec–July corn spread or Nov-July soybean spread is greater than 140% of interest costs at harvest. If the carry is large, Earl sells the carry, like Sally. If the carry is small, Earl holds unpriced grain in storage to sell in late spring, like May (the Friday between May 25-31).
Barney’s corn price is set on the Friday between Oct. 12-18. His soybean price is set on the Friday between Oct. 5-11.
Earl’s choice at harvest is a good one. He beats Barney by 19 and 53 cents/bu., respectively, in corn and soybeans. This is net of storage costs and despite the fact that 20% of his grain is sold at harvest. These are solid results. Earl’s willingness to take a chance with unpriced corn in small carry years led to a measurable improvement over Sally. On the other hand, using Sally’s conservative “sell the carry” approach in large carry years led to a modestly lower price but much better risk profile than May Sellers. In corn, May beat Barney in only 20 of 32 years, while Earl beat Barney in 28 of 32 years. Large carries are not common in soybeans, and Earl’s results are very similar to May Sellers.
I also like to look at the number of years when the margin of victory is greater than 10% (e.g., 40 cents or more on $4 corn, $1 or more on $10 soybeans). Here the margin clearly favors Earl over Barney’s harvest price.
Earl Eitheror makes a choice based on carrying charges and his results are impressive. What are the carrying charges telling you to do?
Meet the rest of the crew:
Up next: Justin Price turns our attention to pre-harvest marketing.
Edward Usset is a Grain Market Economist at the University of Minnesota, and author of the book “Grain Marketing is Simple (it’s just not easy).” You can reach him at firstname.lastname@example.org.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.