Forward pricing: The Great Debate

03/08/2013 @ 3:53pm

I did not post a column last week. I attended the Commodity Classic in Orlando, Florida. The attendance at that event was around 6,500. 

The size of the event has increased steadily since the first combined corn and soybean meetings in Phoenix, in 1996. The prosperity in rural America is somewhat of a stimulus to making a big event even bigger. 

My observation was that there seemed to be three main things on farmers’ minds at Classic. The first was anticipation on the price level guarantees for crop insurance. Almost every active farmer carries crop insurance. The interest in how much the indemnity will be is universal. The second factor of interest, mostly for farmers in the western parts of the country, is when the weather is going to give us some relief from the extreme dryness that began last summer. 


The third factor of interest to farmers in the eastern Corn Belt, who have had some rain, was how to deal with new crop forward pricing with the discounts currently in place in the futures and cash grain markets. Looking forward to this fall, there does not appear to be any good solution to that quandary.


When the dust settled, following today’s report, both soybean and corn futures price patterns ended more bullish than previously. Nearby May corn futures were up 8 cents, but December futures were up only 2 cents. Nearby May soybean futures were down 2 cents, but November futures were down 7. Even though soybean prices were lower, the fact that nearby futures gained on November was positive. In both cases, the message was that the buyers want the grain now, not in the future. 

The same message is being sent by the basis. At one processor in the Omaha area, the different in basis between July delivered soybeans and harvest delivery is 80 cents. For corn at another elevator in a similar location, the basis spread is 66 cents. For both grains, the basis for current delivery is historically extremely good. For harvesttime delivery, it is better than recent years but only average historically.


With this price pattern, I can see only three possibilities for making good sales, especially for the crop that is not yet planted. The first is to use the current extremely good basis to finish selling the last of the 2012 crop grain still in storage. In my area, about the only bushels left to sell are those farmers chose to gamble on in the event of a second year of drought or other production problem. It does not help with new crop pricing.


The second potential strategy is to wait for a weather rally this summer. The market, at this time, is not bidding in a risk premium for either new crop grain. Studying price charts from previous years, almost every year there is a rally sometime between June 1 and September 1 caused by concern over weather problems. The timing on this event is quite variable and psychologically tough to sell into. You only need to look back at 2012 for an example of why it is wise to wait for weather problems to surface before making a sale. 

The current price pattern almost dictates leaving the basis open on new crop sales and risking the possibility of the basis improving prior to harvest. Odds of predicting the basis to improve are much better than predicting the futures price to rally. About four years out of five, the basis is better at harvest than it was on May 1 for new crop grain. I am willing to take that kind of risk by selling an HTA contract or by using the futures. Realize that using futures means risking margin calls. With that kind of potential return, the futures market is a very useful tool.

If you did not attend Commodity Classic this year, resolve to be there next year. It will be in San Antonio, one of my favorite cities, next year. It will again be the last week of February. See you there!