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Corn+Soybean Digest

Expect Harvest Lows Ahead

At a March seminar, when CBOT soybean futures soared above $10 and corn futures rallied to more than $3/bu., someone asked, “With China's appetite for U.S. soybeans and meal, are prices now moving to a new plateau?”

That question, and the bullish attitude of the crowd, signaled that corn and soybean futures were approaching a major high.

As I write this article in September, farmers are wondering if an LDP is possible for both corn and soybeans this fall. The grain trade has become very bearish at a time when corn and soybean prices have taken a big hit.

From the highs posted last March and April, corn prices have dropped more than $1.30/bu. and the new-crop soybean bid has dropped by more than $2.50/bu.

Getting bullish last spring and holding onto cash corn and soybeans turned out to be a big mistake. Getting bearish and giving up ownership of all your cash corn and soybeans in the next 30-60 days is likely to be a major mistake, too.

Corn and soybean supply and demand indicate that the majority of this year's huge crop will be used by the time combines roll.

What To Watch:

The market will often provide several signals that a low is forming when prices bottom this fall.

  1. Watch the spread between the nearby futures and the price of futures contracts into summer 2005.

    One of the signals that prices are close to a low will develop when nearby corn and soybean futures contracts start to gain on the differed futures. This will be a signal that cash prices are low enough that buying is greater than selling.

  2. Watch for the first week that prices close above the two previous weeks' high. This will signal the end of the downtrend and the start of a possible seasonal rally into 2005.

  3. Watch for a day when the market gets hit with negative news — trades lower early in the day and then closes higher. It often takes a negative report to put in a low.

What To Do:

If prices are at or below loan, make sure you have all of the right forms filed to take the LDP that may be available at harvest. This has to be done before you deliver on your contracts and give up beneficial interest.

If prices are at or below loan, use the loan or somehow figure a way to carry inventory into 2005. Even if futures don't rally, the carrying charge in the market along with basis appreciation will pay big dividends into 2005.

Finally, if you come into this fall with nothing sold ahead, you'll want to look at how you market your grain.

Make The Right Move

If you have new-crop hedges and have storage, you may be able to add to your profits by making the right merchandising moves.

Consider rolling Nov. 2004 short soybean futures out to May 2005 contracts. Many of our customers have new-crop hedges on 40% of the 2004 crop into the Nov. 2004 futures.

The May 2005 soybean futures are trading at a 20¢ premium to the Nov. 2004 soybean futures.

There are two ways to benefit by moving the hedge ahead to May 2005. First, the 20¢ carrying charge that May 2005 futures are trading over the November 2004 contract. Second, and potentially the biggest gain, could come from basis appreciation.

The current new-crop basis for delivery to upper Midwest processors this fall is 20-25¢ below November soybean futures.

Last summer, basis went to as much as a $1.50 premium to the futures as processors in the central and western part of the Corn Belt bid up to buy the smaller soybean crop. We don't anticipate that kind of basis premium again this year, but the processor bids could easily go to 20-40¢ over the futures by the time planters start to roll next spring.

The 20¢ carry and potential 40-60¢ basis appreciation makes storing cash soybeans the right merchandising decision this year.

Don't forget, if soybean prices fall sharply lower into harvest you'll still be able to take the LDP if you've locked in the price on soybeans, but haven't given up beneficial interest.

This also will work well for new-crop corn that's hedged.

If you have storage consider rolling your Dec. 2004 short corn futures positions ahead to the July 2005 corn futures. At this time, current carrying charge from Dec. 2004 to July 2005 is out to 23¢/bu.

Most of our customers should have 40% of new-crop corn hedged into Dec. 2004 futures on earlier recommendations.

When these hedges were put into the Dec. futures, the carrying charge to the July 2005 futures was just 2-5¢/bu. Now, that carrying charge is out to 23¢,

You can earn an excellent return on your storage if you add the 23¢ potential carry and a 10-20¢ improvement in basis. Net gain, after deducting for interest charges, is still 25-35¢/bu.

If corn prices fall sharply lower into harvest, you'll still be able to take the LDP because you've locked in the price on corn but have not given up beneficial interest.

Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want more information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].

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