Harvest has finally arrived and conditions are ugly in the Upper Midwest. Ugly or not, this is the time to assess storage opportunities in corn and soybean markets. Should you sell at harvest, or hold for higher prices? How about storing grain and selling the carry at harvest? We look for the answer in cash prices, basis and carrying charges.
Prices: Producers in southern Minnesota and northern Iowa are looking at cash soybean prices near $8.50/bu. - the best price since the start of the trade war in early summer 2018. Corn prices are off 50 cents from their early summer highs. Despite that, $3.80/bu. is the highest harvest time price since 2013. The market is clearly anticipating sub-par yields and lower supplies.
Basis: At 5-20 cents under the December contract, the harvest basis for corn is very strong – in line with levels experienced during the drought year of 2012. Soybean basis is a sharp contrast to corn. The only thing that makes 80-90 cents under the November contract look good is a comparison to last year, when harvest levels were 100-110 cents under. In the months ahead, I expect the corn basis to remain high, but not necessarily stronger than current levels. Based on a smaller crop and stocks, I expect the soybean basis to improve modestly from current levels.
Carrying charges: Carrying charges are the price differences between nearby and deferred futures contracts. In corn, positive carrying charges are the norm - deferred contract trade at a large premium to nearby contracts. The Dec’19/Jul’20 carry is currently trading near 25 cents/bu. This is a good carry, but it has been larger in recent years. Large carries are not typical in the soybean market. However, large soybean stocks persist and, like last year, the Nov’19/Jul’20 is near 43 cents/bu.
In soybeans, a weak basis and large carry offers a great opportunity to sell the carry (aka a storage hedge) in soybeans. How do you “sell the carry?” Here is the storage hedge in four steps…
- Place grain in storage: soybeans in this example
- Price grain with the sale of deferred futures: Jul’20 is currently trading near $9.75/bu.
- Watch the basis narrow: 85 cents under Nov’19 could be 65-75 under Jul’20 next spring.
- Unwind the hedge next spring: sell grain held in storage and buy back futures
This strategy will result in a cash price close to $9.00/bu. ($9.75 July futures sale less a $0.75 under spring basis). Could the same strategy work for corn? Yes, and it will probably get you something better than $4.00/bu for corn.
The opinions of Ed Usset are not necessarily those of Corn and Soybean Digest or Farm Progress.
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Do you prefer to hold unpriced corn and soybeans in storage? As you survey the opportunity for higher prices in the months ahead, I want to remind you that current prices are a result of issues on the supply side of the balance sheet. Supply-driven issues - and the resulting price strength - are not as enduring as a market driven by strong demand. In a matter of weeks, this ugly harvest and sub-par yields will be old news. Market attention will soon turn towards 2020 plantings. I expect 2020 planted acres to be large and, hopefully, on time. The storage hedge can get you $9 soybeans and $4 corn by spring. Unpriced corn and soybeans in storage? Cash prices next spring might be $4 and $9, respectively (or better) - they might also return to $3.40 and $8.00. You have a choice.
Is storage on-farm limited? I suggest selling corn, while storing and selling a large carry in soybeans.