Kevin McNew: Storage Decisions for the New Year
If you held tight to your corn and soybean crop after last fall's harvest, then you probably gladly toasted your marketing successes in 2006.
Corn prices lunged higher in September and carried soybeans along for the ride. Average cash corn prices are up about $1.20 a bushel since October 1 while soybeans are nearly $1.50 even in light of large stocks.
While storing corn at $1.60 a bushel and soybeans at $4.80 a bushel was a no-brainer, the decision to keep storing in 2007 is much different. Prices have responded to the ethanol craze and farmers will likely head the market's call for more corn acres in 2007. Furthermore, the jury is still out on whether +$3 corn will take a toll on feed use (remember the feed user? They still use twice as much corn as ethanol manufacturers). If they show signs of cutting back on corn then acreage buying frenzy may take a break.
All combined, the risk of lower prices is much greater now than it was at harvest. Soybeans, in particular may be vulnerable to downside risk if we get a good South American crop this spring. So, should you continue to store corn and beans in 2007 or should you consider cashing in on high prices?
The right answer might be in the middle ground. Namely, looking at storage returns on forward contracts and possible re-ownership with call options. For corn, finding a profitable forward contract that will cover storage costs has become more difficult as prices have escalated. Carrying charges in forward contracts for corn vary widely depending on where you farm. In the Plains and Western Cornbelt, carry to April is generally around 11 to 12 cents a bushel. By comparison, Indiana and Ohio in the Eastern Cornbelt have carry of 20 cents a bushel for 3 months of storage to April.
With a much larger crop in storage, the returns to storing soybeans are much more favorable. In fact, storing soybeans in the Western Cornbelt seems to be a better proposition then storing corn. Furthermore, if it costs about 3 cents per month to store your crop, then going out to Jun/Jul for storage is your best option in most cases. With Corn, the profitability starts to erode after April.
If you lock in a forward contract, you obviously give up any upside potential on the futures and you also forego any potential basis improvement in the coming months. As of late, corn basis has been relatively flat after bolting higher in the fall. Most cash traders have adequate supplies and there seems little incentive for basis levels to move higher. Furthermore, barge rates have slid considerably over the last few months, so it seems unlikely that barge rates will fall much lower, which could potentially lift basis. Over the last month, corn basis was unchanged on average across the U.S., although there were some pickets of strength in the Eastern Seaboard and Western Plains.
For soybeans, basis levels have been firmer over the last month, but it has been strongest in the Upper Midwest where gains of 5 to 10 cents a bushel were fairly common. With cash prices approaching the high $6 mark and ample old-crop supplies still in farmer hands, we don't look for large improvements in soybeans basis across the country.