Using a basis contract to market corn
Despite a late start, the 2013 harvest progressed rapidly, and yield prospects increased across most of the Corn Belt. The U.S. corn yield average rose by 5.1 bushels per acre from September to November, according to USDA’s latest estimate. Farmers are expected to harvest a record 13.989 billion bushels in 2013. Final USDA estimates will be released on January 10.
From mid-June to mid-November, the December 2013 corn futures contract declined by more than $1.50 per bushel. The nearby futures market ﬁnally found support around $4.15 per bushel. A large movement upward in price isn’t likely anytime soon without a global change to supply and demand fundamentals.
Farmers who have unpriced corn should consider using a basis contract to market at least a portion of those bushels, especially if these are stored commercially.
An attractive basis and need for cash will be the main drivers for farmers to move stored bushels. With high 2013 farm income levels, farmers may wait to sell bushels until after the ﬁrst of the year or defer additional income. I expect corn basis to remain attractive through year-end. Basis contracts encourage farmer movement of cash corn and should be considered. Commercially stored bushels will likely have higher ﬁxed costs than on-farm stored bushels. However, some on-farm bushels may need to be moved by late winter for cash ﬂow purposes or because of corn quality concerns.
Seasonal futures price trends indicate corn futures prices don’t typically rally in the fall and winter months. That’s because most everything is known about Northern Hemisphere feed grain crops where nearly 85% of the world production takes place. However, most farmers will be reluctant to give up ownership of bushels at sub-$4.50 per-bushel cash corn prices. The memory of $7-per-bushel cash corn just a year ago still lingers.
The chart below compares the cost of storing corn at a commercial elevator to on-farm storage. Accruing costs per bushel are reported every three months or until nine months following harvest. The assumptions: Cash corn is valued at $4.20 per bushel; interest rate of 4.5% on borrowed funds; handling charge of 20 cents per bushel paid up-front; on-farm storage at 2 cents per bushel per month; commercial storage at 4 cents per bushel per month.
The chart indicates how much cash corn prices need to improve over three, six, and nine months to justify storage. Commercial storage will be higher than on-farm costs. The cash price received for commercially stored bushels will also reﬂect the basis offered at that facility when sold.
Using these assumptions, storing bushels until April means cash prices need to improve from 44 cents to 56 cents per bushel to break even. Odds are, cash prices offered this coming spring may never reach breakeven. Also, higher moisture levels for on-farm stored corn may widen the basis in late-winter months as larger volumes of bushels are delivered to avoid moisture discounts.