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Add $50/acre to your bottom line
Farming has changed a lot in the 38 years that I’ve been writing about marketing grain. Before the Internet, you didn’t have GPS or autosteer on your farm equipment, but you’ve quickly adapted to new technology, and the pace of change is increasing. Changing technology has also altered the way you sell your grain. You now have a number of marketing alternatives that were not available 30 years ago.
The tools for marketing have changed, too. Before 2009, when you had a futures order, you had to call a broker in the grain pit at the Chicago Board of Trade (CBOT). You could only do that between 9:30 a.m. and 1:15 p.m. Today, you can place orders 24 hours a day, and the markets are open 21 of those 24 hours – from Sunday night to Friday afternoon. You don’t have to use a phone to place an order; you can use a computer, iPad, or an app on a smartphone.
Previously, you would sell grain if you needed the money. You only had two choices: cash sales or cash-forward contracts. Today, if you are only using cash sales and forward contracts, you are not getting the full income potential you could have if you used the new alternatives that are now available.
To make the right decision on what marketing alternative you should choose, you need to understand four key concepts.
- Basis. Basis is the difference between your cash price and the CBOT futures price. In the preethanol days 20 years ago, basis bids in the western Corn Belt would get as wide as $1 per bushel below the CBOT futures.
Now, this has narrowed. In most areas, basis bids are just 40 to 50 under at harvest and often drop to just 10 to 20 under by the following spring and summer. Sometimes, when there is a shortage of cash corn, the basis turns into a premium. During most of the summer of 2013, for example, corn farmers had the chance to sell at a cash price that was higher than the futures market.
The lesson? When you are selling grain, avoid selling on a wide basis. Use your storage as a marketing tool; hold off on moving grain until your basis levels improve.
- Inverted market. When you compare a nearby grain contract to the upcoming contracts, are prices going up or down? Are they going up enough to pay the cost of holding the grain?
For example, the nearby corn contract, September 2013 corn, is trading at $5.30 per bushel as I write this. Meanwhile, the December 2013 corn contract is trading at $5 per bushel. Since the price of the deferred (December) contract is less than the nearby, this is called an inverted market. This pattern tells you that end-users want your corn in September but not so much in December. Listen to that message. In an inverted market, it doesn’t pay to hold the grain.
- Carry market. The opposite situation – if the December contract is higher than the September – is called a carry market. If the December is high enough to cover all your costs of storing (carrying) the grain that long, then you would call it a full carry market. Think of carry (or carrying charge) as how much – if anything – the markets will pay you to store your grain.
Look at your cost of holding the grain, including both storage and the interest, and then look at the futures market. What are the futures contracts trading at either 30, 60, or 90 days beyond the nearby futures? For example, if December 2013 corn is trading at $5 and July 2014 corn is trading at $5.25, then the market is offering you a 25¢ carry to hold your corn until June or July of next year. If you can store your corn for that long (and tie up some cash to hold the futures contracts) for less than 25¢, then you can make money.
- Futures market. In September 2013, you can use the futures markets to hedge or forward-contract grains all the way out to December 2016. If the grain market rallies to some extremely high price and profit levels, you can lock in sales ahead on your production for the next two to three years. You absolutely must know your cost of production and your breakeven before you sell.
Use these four concepts to make better merchandising decisions. The first step is to be aware of the different alternatives that you have. Before you decide to sell any of your crops, go through a merchandising checklist and ask these six questions:
- Are prices above my cost of production?
- What is the current basis?
- Does the futures market offer a carrying charge?
- What percent of my crop is sold?
- Do I have resting offers in place?
- Do I have any offers that expire this month?
Create a spreadsheet or a carrying charge chart that allows you to see how much the market is paying you to hold onto your cash corn and soybeans after harvest, and, at times, to put spread orders in to lock in the carry.
This year, the trend (or alignment) of the futures market is telling you to sell any cash corn and soybeans that you can get harvested in September. This is because September corn and September soybeans are trading at a large inverse to the December corn and November soybean contracts. You do not want to hold on to see if prices go lower.
If you are not harvesting corn and soybeans until October, the carrying charge charts suggest different strategies for corn and soybeans.
The corn market is paying a 25¢ carry to hold your corn from December 2013 until July 2014. Add the carrying charge onto a minimum 20¢ basis appreciation and you can gain 45¢ for holding your corn six months. If you have 180-bushel corn, that brings in an additional $81 per acre. Even after you deduct your increased storage costs, you can add $40 to $50 per acre to your bottom line by storing corn.
The market is not paying you enough to hold your soybeans. The carry from November 2013 to July 2013 is just 10¢ per bushel. Even if you add on 20¢ in basis appreciation, it just does not make financial sense to store soybeans. If you want to hold off on taking the income until 2014, hedge into the March 2014 contract, wait for the basis to improve, and turn your soybeans into cash in January 2014.
These merchandising decisions are complex concepts to learn, but keep trying. Once you learn them, they can make your farm a lot more profitable and also help manage your risk.