On Monday, March 14, a client called to discuss a proposal his grain merchandiser suggested. In fact, I had several clients call me in the past ten days with similar questions.

Joe had delivered corn to his merchandiser and had the basis set at even with the May 2022 futures. At the time of delivery, Joe expected corn futures would continue to make new highs into the spring, so he had not locked in the futures price. Therefore, every day May corn futures went higher, his corn basis contract was worth more.  

Joe explained to me his merchandiser suggested Joe roll his May basis contract from the May futures to the July futures to capture the “carry.” Joe understood that “carry” is the return to storage. Since Joe had the basis set, he knew there was no way to capture carry in the cash market, so the only place to capture carry would be in the futures market. Joe told his merchandiser he would get back to him.

Joe called me and asked me:

"Is there a way to capture carry in the cash market after the basis is set?" Joe was right, it cannot be done. It is possible to capture carry in the futures market after the basis is set, but not with a basis contract.

Joe asked how could he capture carry by rolling from May to July futures given the July corn price was 30 cents lower than the May corn?

When a deferred delivery price is lower than a nearer delivery price, that is called an “inverted” market.  It simply means the market is not willing to pay anyone to store that crop.

Joe asked what was the purpose of the phone call? Clearly, I did not know.  I told Joe the corn market had been inverted since the middle of October of 2020 and it eliminated a major profit center for merchandisers in that there was no money to be made storing corn. So, possibly his merchandiser was trying to create some profit.

Most people who pay attention to the market expect May corn to continue to be stronger than July corn as the calendar moves into spring planting. If I was going to try to make some money off a farmer’s basis contract, I would tell him something enticing like, “I recommend you roll your May basis contract to the July futures to capture the carry.”  

Most farmers do not understand carry, but all of us think capturing anything other than a rabid wild cat is a good idea. So, the farmer agrees to have his merchandiser roll his May basis to July. If the roll had been done at the time we were talking, the merchandiser would be selling May futures to liquidate the long position at a price 30 cents higher than his buy of July futures to replace the long May position. The farmer’s basis contract would then be 30 over the July instead of even with the May. Why? Thirty over the July is the same cash price as even with May. 

If the merchandiser did that roll, what would he gain? Maybe a penny a bushel service fee with a cost of a quarter-cent commission to roll the futures.

But, if the merchandiser talked the farmer into doing that roll, but did not execute the roll, the merchandiser’s futures account would gain or lose the action of the May futures -- and the farmer would gain or lose the action of the July futures.  

I told Joe leave it in the May. As of noon today, (March 17), just four days later, May futures are 35½ cents above the July. Joe gained 5½ more cents than he would have gained if he rolled to the July. There is probably another dime to be made. What did it cost Joe to say no? Nothing.

Wright is an Ohio-based grain marketing consultant. Contact him at (937) 605-1061 or [email protected]. Read more insights at www.wrightonthemarket.com.

No one associated with Wright on the Market is a cash grain broker nor a futures market broker. All information presented is researched and believed to be true and correct, but nothing is 100% in this business.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.