The volatile and head-scratching year of 2020 continues. As we move into the "gut slot" of harvest, grain spreads are not doing what many in the industry were expecting. In the commodity world, prices differ from month-to-month, based on supply and demand. The market builds carry, or a premium in deferred contracts, when it wants to incentivize producers to store the grain for future delivery. The market will take way the carry and sometimes trade inverted when the nearby contract is at a premium to deferred contracts, or when a commodity is desired today and not later.
In my 25 years of experience, the market will typically “pay” producers to hold off bringing grain to market by building a carry into the pricing. On average, the market will pay 3 ½ to 4 cents of a monthly premium to encourage sellers to store the grain and not move it to the market. Last year the spread between December and March futures was 15 cents near the expiration of December futures.
Earlier this month, the USDA estimated this year’s total corn supply 16.742bb; this is 859mb bigger than last year’s supply. The extra bushels had many in the industry thinking spreads this year would build a “carry” like in most years, but that has not happened. The December/March spread settled at 5 cents today and traded as narrow as 3 cents during the session. The widest it was this year was 14 cents on May 4.
With only 5 cents of carry from December to March, and only 1.75 cents from March to July, the market is telling producers not to put the crop in the bin but to deliver it now. If demand continues to outpace grain moving to market, it is conceivable the spread will invert and, in essence, penalize you for storing the grain.
With the narrowing of the spreads, futures prices higher now than the spring or summer, and an unseasonably strong basis, the market structure is telling producers it wants the grain now. We encourage producers to listen to what the market is telling them to do, which is market grain.
Remember the emotional roller coaster you were on this year? February looked incredibly promising, the summer was filled with despair and now the market is trading a few cents off the marketing year high. Today's revenue is at levels most wouldn't have thought possible 90 days ago.
Make a $4 cash sale and reward the market. The lack of carry in the market allows you to re-own the grain with options out several months without the typical carry charges. This marketing idea will allow you to maintain ownership if the market continues to rally, but it takes way the downside risk if the roller coaster of a year has another downward move in store for us.