November 1, 2017
To everything, there is a season. Especially in the grain market. The paths taken by corn and soybean futures into the end of the year, along with trends in the cash market, could be crucial in deciding when and how to sell 2017 crop inventory in on-farm storage.
To be sure, just selling when prices move to profitable levels is one strategy. Nobody ever went broke selling for a profit. Trouble is, selling early could mean forgoing extra gains, sometimes substantial. Farming is a boom-or-bust business, and money made during the good times can pave over income potholes in bumpy years. And sometimes that breakeven price may never be reached.
Our long-term study of storage strategies shows just locking the bin doors is a way to earn higher net returns on both corn and soybeans. But it’s not fool-proof. Since 1985, on-farm storage added gains after costs to the harvest price 72% of the time in soybeans, but had just a 50-50 record in corn. And while storing cash was hands-down the most profitable strategy for corn, buying futures to replace soybeans sold at harvest was nearly as good. It actually earned slightly higher average returns but made money a little less frequently.
Separating basis and futures decisions that make up the final cash price received by farmers is one way to stretch the market. Squeezing every penny possible by using different marketing tools can minimize losses and amplify gains. Setting up a decision tree can clarify your choices, because both basis and futures tend to face major turning points soon.
Basis ins and outs
The first branch of the tree is basis, the difference between cash and futures.
After weakening into harvest in October, basis for corn and soybeans tends to strengthen into delivery of December corn and January soybean futures. Basis for both crops usually strengthens more into spring. But these basis gains on average don’t pay for the cost of holding grain anymore on farm. Net basis in June is 10 cents weaker for corn and 20 cents less than soybeans on average.
Waiting to fix the basis may still be worthwhile. The futures market may also provide enough carry to justify holding off. The spread between January and July soybean futures was 24 cents into harvest. If that held, it only provided a few cents of potential appreciation. By contrast the spread between December and July corn was nearly 30 cents at harvest. Deducting the 10 cents in losses from net basis still left potential for 20 cents of appreciation. That’s enough to justify the risk of holding off on the basis decision.
Moving onto futures
The next step of the process is futures. Market action in winter can’t forecast drought. But it can signal when the tide is rising or falling. In corn, the turning point for July futures comes from Thanksgiving to mid-December. In years with normal price action, futures tend to break through harvest lows set in October. In bullish years, the market on average holds, setting up a rally through the winter and possibly longer.
Soybeans’ turning point tends to come between Christmas and New Year’s. Markets moving above August highs or holding October lows can be set up for a rally.
Corn growers who haven’t fixed their basis, waiting for more strengthening, can sell July futures or hedge-to-arrive contracts if the futures trend looks bearish. Soybean growers with bearish futures would just sell cash to fix both ends of their price, unless there’s sufficient carry to justify hedging and waiting on basis.
Options can also play a role in these plans. Implied volatility, which influences the cost of options, is usually modest during winter, when weather risk is minimal. The cost of the option eats into potential storage gains but provides a measure of protection. Those who sell cash or futures can buy calls, while basis contracts or long futures positions can be covered with puts.
Breaking down the postharvest marketing decision into three steps doesn’t guarantee success. But having a process is usually better than just guessing.
Decision Time: Risk Management is independently produced by Farm Futures and brought to you through the support of Case IH.
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