Selling summer weather rallies is a lynchpin of marketing plans for many growers. After all, markets are usually hottest when temperatures also soar.

Despite record temperatures this summer, however, the markets stayed cold. Opportunities to price 2024 crops for a profit didn’t just come and go, they didn’t come at all for farmers with average production costs. That means operations with unpriced grain face major decisions about what to do next as harvest rapidly approaches.

The choice isn’t a binary one between selling and storing. Different methods of pricing and storing, including cash contracts, futures and options, provide plenty of flexibility about how to sell, where to deliver and how long to store. But they also add complexity, creating a three-dimensional chess game with a laundry list of questions to complicate any prediction about what the market may do and when it may do it.

Is it best just to price and deliver right out of the field? Same goes for haul yourself versus hire it done. Which is more profitable?

Forward contracts vary by length, effect on basis and other decision rules. Exchange-traded swaps, futures and options open more marketing alternatives and, of course, cash forward contracts can mimic these features.

Still, many marketing plans boil down to “holding and hoping.” Success is usually, but not always, measured by rallies that are determined by fundamentals of supply and demand. Trouble is, there’s no way at harvest to predict how those factors will affect markets over the course of the marketing year that began Sept. 1.

Any decisions made now could be right, but could also turn out to be dead wrong when the last load of 2024 grain is delivered.

The ultimate small ball: storage hedges

As this fall’s choices come into focus, the past offers guidance about what worked and what didn’t. Farm Futures long-term study of different strategies outlines risks and rewards of holding grain, either in storage or on “paper” using futures, options or other cash contracts. Your facilities, location and tolerance for risk all come into play.

The study traces returns for 1985 to 2023 crops at various locations across the growing region from the first week of October through expiration of July options in late June. Results illustrate the challenge – some would say futility – of trying to pick what will make the most money compared to just selling off the combine.

The only 2023 crop strategy for both corn and soybeans to beat the harvest price may also be the one least likely to be in most farmers marketing toolbox: the storage hedge.

Selling futures or hedge-to-arrive contracts to protect inventory from falling prices is one way elevators make money. But this practice lacks the allure of holding crops and waiting for a big rally. Indeed, storage hedges are the marketing equivalent of the ultimate in small ball – hitting singles, stealing bases and making sacrifices. This strategy offers no crowd-pleasing home runs.

Hedge for basis gains?

On average at the eight locations studied, the storage hedge for 2023 corn stored on farm returned 21 cents a bushel, after costs for handling, commissions and interest on debt not repaid with funds raised from selling off the combine. Soybean gains over the harvest price improved 46 cents at the seven locations tallied from Ohio to Nebraska.

By comparison, holding corn unprotected lost 64 cents and soybeans finished $1.24 in the red.

Commercial storage fared even worse thanks to fees that typically ranged from four cents a bushel to eight cents or more per month.

The catch? Storage hedges offer returns that are modest in exchange for reliability. Hedging with futures limits post-harvest gains to basis appreciation – that is, how much basis strengthens, which in this case is measured as the difference between October cash prices and July futures. Basis improvement is easier when cash prices are weak at harvest as they were a year ago, when corn averaged 62 cents under the board.

After disappointing production in 2022, corn yields bounced back near normal last year, which helped stocks improve dramatically and weakened harvest basis. But corn demand also turned out better than expected, which helped reduce the 2023 crop surplus 11% by July and forced end users to bid up basis to secure supplies.

How much does harvest basis matter to storage hedges? If it’s weak at harvest, odds of profitability increase to nearly 90%. That’s not a sure thing, but close to it.

Watch harvest basis this fall for clues. And monitor the spread between harvest contracts and those for deferred delivery in the spring and summer of 2025. Burdensome stocks tend to widen out this “carry,” which also reflects the cost of storing grain, notably interest rates. Rates will still be high this fall. But, because inflation appears to be cooling, the Federal Reserve is expected to begin cuts in September.

Why calls can work

Corn storage hedges beat the harvest price 81% of the years in the Farm Futures study, by far the most reliable strategy considered. Hedging soybeans didn’t match that record, but did top harvest prices 62% of the time, third best for that crop, lagging storage on farm without protection, which worked 73% of the time.

Selling soybeans off the combine and buying futures to store the crop “on paper” was second at 67%, another indication that gains in soybeans come on the board as well as in the cash market. That strength in futures also helps explain why call option surrogates turned out more successful for soybeans than corn.

Those owning calls have the right, but not the obligation, to purchase futures at a fixed “strike price. Those rights can gain in value if futures rally enough. So, if soybean futures are more likely to rally than corn, odds for an option profit also improve.

Nonetheless, selling cash at harvest and buying calls had the lowest odds of earning a higher return compared to other strategies – around half the time for soybeans and a third or less in corn.

Calls can be hard to understand, but the reason they trailed other strategies is simple: premiums paid up front to purchase the instruments. These costs can be recouped if the market stages a big rally, but time is not on the side of options. Calls and puts with longer until expiration cost more than those with shorter life spans, and this “time value” decay accelerates in the final two to three months before expiration.

Uncertainty about the market’s potential may also impact option prices, increasing costs when it’s higher, as reflected in the “implied volatility” of premiums. Implied volatility ended the summer a little above average, though it was still seasonally relatively weak.

Owning calls does remove some of the risk of owning grain in the bin – losses are limited to the premiums if the contracts expire worthless, as is often the case.

Calls also can pay off big if the market explodes higher. Soybean calls purchased at harvest in 2007 netted nearly $5 a bushel, with corn contracts earned more than $3. So, in the grain market, calls are the opposite of small ball. And it’s worth remembering results of the 2023 World Series: The Texas Rangers smashed almost three times as many homers to win their first championship ever last season, defeating the small-ball Arizona Diamondbacks.

View complete results of the study, organized by years and location:

Central Illinois

Evansville Corn

Louisville Soybeans

Kansas City

Minneapolis

North Central Iowa

Omaha

Toledo

All locations by year

Knorr writes from Chicago, Ill. Email him at [email protected]

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