This summer grain farmers caught a break when grain prices rallied. But those who wait too long for even higher prices may get burned. If you’re hoping for a rally after mid-July, the odds are against you, says Bryce Knorr, Farm Futures contributing market analyst.
“On average over the past 25 years, the odds of a rally after mid-July through harvest is 44%, but realistically it’s probably more like 35%,” he says. “We could see higher prices, but it depends on how low they are on July 15. A crop rated 70% good-to-excellent translates to a 180- to 185-bpa national yield. If the market thinks it will make a big crop, we might make a bottom around the time USDA confirms that in the August crop report.”
When corn prices in 2012 climbed to $8, Nebraska farmer Roric Paulman had already sold it at $6.63. On the flip side, when COVID-19 tanked prices, he didn’t have any of his 2019 production not sold. “We’re creating this challenge on ourselves by not marketing,” he says. “We can’t keep producing ourselves into oblivion.”
That’s why he encourages his son to become a more aggressive marketer. “You’ve got to move this, and put it into play,” he says of their production. Their farm has the ability to store 100% of what it produces, but it’s important to realize you can’t turn a crop into profit without a sale.
At the beginning of June, Paulman was already selling his 2021 and 2022 grain and working with five different brokers to have real-time quotes and positions. Some cash sales were below the cost of production but still fit into his ROI model.
Basis could also play a role in revenue this year, Knorr says. A record crop on top of Sept. 1 old-crop supplies topping 2 billion bushels could easily swamp storage capacity in the U.S., even if growers and merchandisers find the financing to add bins.
Weak nearby basis is one mechanism the market uses to put corn in storage at harvest. The other tool is carry. The spread, or difference, between December futures and contracts for delivery in the following spring and summer provides additional incentive for storage if potential for appreciation — nearby basis improvement plus carry — is enough to pay for the cost of storage.
“Carry this year could be a wild card,” Knorr says. The Chicago Board of Trade increased maximum storage fees at deliverable locations from 5 to 8 cents a bushel after last year’s harvest. But low production and adequate storage held back 2019 harvest carry to less than 3 cents a month.
“The full commercial carry will be somewhere around 10 cents a bushel per month,” Knorr says. “We won’t get there, but the question is: Will we get up to 5, 6 or 7 cents carry per month on the board? That becomes advantageous for hedgers and hedge-to-arrive contracts.”
Even with weak harvest basis, we may still see some basis opportunities. “We saw very strong basis at ethanol plants, even though we had too much corn, because they needed it and farmers weren’t selling,” Knorr says. “It changed after ethanol fell apart, but it’s coming back now. So, there may be opportunities. You need to be flexible and pencil things out with different scenarios to figure out if you can make money or how to lose less money.”
If the growing season manages to avoid any tidal waves, farmers will likely see weak harvest basis along with ground piles that exceed storage capacity this fall. If supplies remain burdensome, grain held in on-farm bins could be a moneymaker for growers who can hedge rallies, roll those positions to deferred 2021 futures and wait for the cash market to narrow its difference to futures.
While new steel may not cash-flow, depreciated facilities could net 15 cents a bushel or more depending on carry, opportunity costs and basis improvement, Knorr says.
“To succeed through the next few months, you need knowledge of the markets, the ability to hedge, a sharp pencil and a savvy banker,” he says.
Call options to protect against a big rally, however unexpected, may also be needed to offset lower PLC payments, especially for those who sell off the combine or face hedge losses. Money will be needed for cash flow because any 2020 farm bill payments won’t be received until October 2021. Cash grain also would be held off the market until reasonable basis targets are achieved, which could take well into next spring.
“Determine at what level it makes sense to start preharvest hedges, if and when the market can sustain something of a rally,” Knorr suggests. “December futures might need only a modest bounce to be profitable, when storage returns and safety net supports are included.”
Make accrual adjustments to your income statement to get a better idea of viability on the farm. Stretch cash flow by refinancing debt if you haven’t already. Review production costs and consider living off depreciation for another year. “Everybody’s cost of production is different, but you need to be realistic, and that includes whatever draw you need for family living,” Knorr concludes