As harvest, the time is right to ask a question inspired by William Shakespeare: “To store, or not to store?” This question is at the core of a post-harvest marketing plan.
To help answer meet my marketing friends, Barney Binless, May Sellers, and Earl Eitheror. Their marketing results over the past 31 years offers some guidance.
Barney Binless has no on-farm storage. Barney delivers his corn and soybeans at harvest, and his price represents the price of grain at harvest.
May Sellers has on-farm storage and she does what most producers do at harvest; stores unpriced grain and sells it the following spring.
Earl also has on-farm storage. At harvest he makes a choice. If carrying charges are large – large carries speak to a bearish price environment - Earl plays it safe by storing grain and selling the carry in the market. He does this by selling July futures (or a July HTA) against grain in storage. He unwinds the hedge at the end of May by selling grain and buying back the futures position.
And if carrying charges are small? Small carries (or inverses) reflect a more bullish price environment. In this case, Earl copies May Sellers and stores grain unpriced.
Let’s look at their post-harvest results for corn and soybeans, using Iowa average cash prices over the last 31 years.
- Barney sells at harvest - the Friday between October 12-18 for corn, October 5-11 for soybeans.
- May holds her grain unpriced in on-farm storage and sells it on the Friday between May 25-31.
- Earl sold the carry when carrying charges were large (>140% of interest). When carrying charges were small (<140% of interest), he copied May with unpriced grain held in storage.
- May and Earl sell 20% of their grain at harvest, and this sale is part of their average price. Their results are also net of variable costs, including interest at 1% over prime and 8 cents/bu. shrink and handling for corn, and 11 cents in soybeans.
- The figures in parenthesis (e.g., 12/31) after May and Earl’s results reflect the number of years out of 31 years they received a price less than Barney’s harvest price.
Look at the frequency of large carrying charges in corn vs. soybeans. Large carries – deferred contracts trading at a premium to nearby contracts – are common in the corn market (25 of the past 31 years). In these large carry years, May and Earl are taking very different approaches to pricing stored corn.
In contrast to corn, large carrying charges are not common in soybeans (3 of 31 years). When carrying charges are small, Earl mimics May’s approach to holding grain unpriced. In all but three years, Earl and May marketed their soybeans in exactly the same way.
In corn, both May and Earl are beating Barney’s harvest price. May and Earl beat Barney by 16 and 11 cents/bu., respectively. Keep in mind that the margin is net of on-farm storage costs and includes the fact that both players sell 20% of their production at the harvest price.
May beats Earl by an average of 5 cents/bu. Are you impressed? I am just as impressed by Earl’s consistency over the years. In only 4 of 31 years was Barney’s harvest price better than Earl’s. May had some outstanding years, but Barney beat her in 12 of 31 years.
The results are even better in soybeans. May and Earl beat the harvest price by an average of 50 and 43 cents/bu., respectively. As you would expect, holding unpriced grain is riskier, and Barney is beating May and Earl in about 1 of 3 years.
We started with the most basic of questions at harvest: “To store, or not to store?” Earl answers with a different question: “What is the carry in the market?” The current corn market is sporting a large carry, trading near 25 cents from Dec’20 to the Jul’21 contract. Earl would sell that carry.
After nearly two years of trade-war induced larger carries, the soybean market has returned to a more normal market – the May’21 and Jul’21 contracts are currently trading just a few cents premium to the Nov’20 contract. Earl, like May, will store unpriced soybeans after harvest.
You might wonder, “Is this all there is to post-harvest marketing – just look at the size of the carry and make a choice to emulate May or Earl?”
There is more, and we will discuss it next month. But answering the question, “What is the carry?” is a great place to start.
Read other articles in the Advanced Marketing Class series:
- Adapt your plan to a changing market
- The peril of holding grain too long
- Profit opps in seasonal price patterns
- How to write a pre-harvest marketing plan
- Using decision dates to turn a plan into action
- Setting price targets
- Managing price risk with a storage hedge
- Why I prefer futures contracts
- The pros and cons of using options
- How to use technical analysis to market grain