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Strange happenings

Agriculture.com Staff 09/29/2006 @ 11:22am

Last week, I explored the possibility that the harvest low in soybean futures might have come in September this year.

I failed to mention that the average date for the harvest low in corn futures is September 25. What is rare in soybeans is common in corn. After the quick pop up in both grains on Thursday, it looks more likely that we have seen the harvest lows in both.

Combines are just starting to run in my community. Corn yields are running about equal to the long-term average. I don’t know anyone who has finished a field of soybeans to get a yield report. Yesterday’s action in the futures market was accompanied by a widening of the basis in cash soybeans.

This does not bode well for the future of cash soybeans because it indicates that the strength in the futures market was not paralleled by demand. Basis has not gone to a dollar a bushel as merchandisers were warning us last summer. However, at a negative 70 cents, it is still very wide compared to other years.

Corn basis held at a dismal 44 cents under December futures. I suspect that the basis being able to hold in the current range when futures rallied indicated that the storage situation is not as tight as most people had expected. This could be due to lower yields. However, I think it is a little early to make that call.

The strange thing about the corn market is that as prices go up, the carry between December futures and July futures is narrowing. After the close yesterday, the carry was 27-cents. It makes my decision to sell the carry at 32-cents a month ago look pretty good. I am still behind on the hedge as a whole, but there is a lot of time left.

Storing corn for sale next summer continues to look like the strategy of choice. If you are worried about the price dropping, sell the carry on part of the crop and leave the rest open. That is what I am doing. For farmers without bins no strategy is comparable. With the carry roughly 28 cents and room for the basis to improve at least 20 cents, the cash price could possibly go up 48 cents without raising futures. Another way to look at the situation is that you can sell July futures and have a good chance to pick up 48 cents on the cash carry if basis approaches normally by next summer.

Selling cash and buying futures or call options is, in effect, selling low and buying high. Commercial storage locally for eight months costs 24 cents. A July corn at-the-money call option has 24 cents of time value! Imagine that, they come out the same! If you have considered selling cash and buying calls, that strategy would only be profitable if the basis stays the same and cash prices go up 52 cents or if the basis improves to normal and cash goes up 72 cents. Could it happen? Of course. Will it happen? Maybe, but you are starting out in a big hole that will require a lot of things to go right to make a profit.

Last week, I explored the possibility that the harvest low in soybean futures might have come in September this year.

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