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Storage Can Pay Big Dividends This Year
This fall, markets responded to record corn and soybean crops in the U.S. That response was cash corn and soybean prices falling to the lowest level since 2009. When cash corn drops below $3 per bushel, it is essential that you make every penny you can. The extra 30¢ to 50¢ you can make on your 2014 corn and soybeans can be the difference between a profit or a loss this year.
2 Basic Concepts
To make the right merchandising decisions, you need to understand two basic merchandising concepts: basis and carrying charge.
• Basis is the difference between your local cash bid and the Chicago Board of Trade futures market. Think of basis as your cost of getting your corn or soybeans to Chicago. Add in the operating costs – and a profit – for your elevator. The normal basis pattern is for the worst basis at harvest. After that, basis levels usually improve by the following spring and summer. This year, basis levels were really wide at harvest in the western Corn Belt. They are expected to improve dramatically by next year.
• Carrying charge is when the futures contracts that are trading two to six months out in the future are trading at a higher price level than the nearby futures contracts. (In other words, the CBOT futures market usually has a carrying charge built in.)
Here’s an example. July 2015 corn futures are trading at $3.70 and December 2014 corn is trading at $3.40. In that case, the July 2015 corn contract is trading 30¢ higher than December 2014 corn. In other words, the corn market has a 30¢ carry.
If you understand the basis pattern in your area of the country and understand how carrying charges work, you can make better merchandising decisions.
When you make better merchandising decisions, you are running your farm to maximize dollars – not just production.
For corn farmers this year, the combination of improved basis and the large carrying charge makes it a logical decision to hold corn until June or July 2015.
Western Corn Belt corn farmers have basis levels as wide as 80¢ below the futures market. Basis will improve by perhaps 40¢, and the carry will add another 30¢. (See charts on the previous page.)
Corn farmers in the western Corn Belt can likely make 70¢ per bushel by holding corn until next year.
Even after you deduct 20¢ to 30¢ for interest, shrink, and electricity, you should still add 40¢ to 50¢ to your bottom line. If you have 170 bushels, then you have an extra $68 to $85 per acre in revenue.
For soybean farmers, this is the first time in many years that you have a significant carrying charge in the soybean futures market.
Storing soybeans is not as attractive as storing corn, but it still makes sense (as in dollars and cents). If you get the normal basis improvement by next year and keep the current carrying charge in the soybean futures market, then it can add to your bottom line.
Western Corn Belt soybean farmers should make an extra 30¢ to 40¢ per bushel holding soybeans into next spring and summer, even after figuring shrink and interest. (See charts at right.)
For eastern Corn Belt soybean farmers, it’s a way to make an extra 20¢ to 30¢ per bushel. These days, with soybeans below $10 per bushel, it is more important than ever to earn that additional return.
If you have limited bin space, should you store your corn or your soybeans?
Like most years, this year you will make the most money storing corn. The fundamentals for corn basis improvement are much better than soybeans as you look ahead to 2015.