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Understand Carrying Charges

Harvest is here and it’s time to make choices about marketing your crop. What will you choose this year? Will you sell soybeans at harvest, or are you leaning toward on-farm storage and a later sale? Will you hold corn in storage and sell the carry?

This choice could be a lot easier if only we knew the answer to a few important questions. For example, where is the economy going? Over the past two years, you could hardly find a better gauge for commodity prices than the stock market. What about the Russian wheat crop? Their worst crop in decades sent wheat prices soaring. How large will the U.S. crop be? We could have a second consecutive year of national yield records in corn and soybeans, something not seen in nearly 40 years. What about the dollar, La Niña and commodity funds? If we had answers, our postharvest choices would be easy.

Then again, maybe we’re not asking the right questions. Earl Eitheror, a celebrity producer in my make-believe world, bases his choice on the answer to one question at harvest: What is the carry in the market?

Carrying charges are the price differences between futures delivery months (e.g., December and July corn futures, November and May soybean futures, etc.). The corn market is showing large and positive carrying charges – deferred contracts trading at a premium to nearby contracts. When carrying charges are large, Earl plays it safe by storing grain and selling the carry.

In contrast to corn, carrying charges in the soybean market are flat – deferred contracts trade at roughly the same level as nearby contracts. When carrying charges are small or inverted, Earl chooses to take a chance with unpriced grain in storage and sells the following May. You, like me, may choose to refine Earl’s choice, taking into consideration a good harvest price for soybeans and your appetite for risk.

My data shows that over time, Earl’s choice pays off vs. the harvest price. His results are consistent for corn and soybeans. But nothing is 100% – Earl’s choice does not work every time.

So, you have a choice: Sell at harvest, store to sell later or sell the carry. Are you asking the right questions?


Sell the carry?

It may sound foreign, but you know what it is to sell the carry. Do you recall your neighbor pricing corn before harvest, but instead of harvest delivery, he contracted for June delivery at a 25¢ premium? He sold the carry in the market.

Or last year, when your uncle decided to roll an HTA corn contract forward, exchanging the December base price for a 27¢ premium in the July contract. He sold the carry. Or two years ago, when you called your broker to sell May corn futures at a 20¢ premium to the December contract. You sold the carry.

Selling the carry allows you to capture a positive carry in futures prices, buy time for a better basis, hedge against lower prices and defer tax revenues to the next year. It is a powerful and profitable pricing alternative.

September 2010

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