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Basis & Carrying Charge: 2 Key Grain Marketing Themes
This fall, markets responded to record corn and soybean crops in the U.S.: Cash corn and soybean prices fell to the lowest level since 2009. When corn drops below $3.00 per bushel, it is essential that you make every last penny you can. The extra 30 to 50 cents you can make on your 2014 corn and soybeans can be the difference between a profit or a loss this year.
How can you do this? 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.
The second basic concept is carrying charge. A 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: Let's say 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 cents higher than December 2014 Corn. In other words, the corn market "has a 30-cent 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 of 2015. Farmers in the western Corn Belt have basis levels as wide as 80 cents below the futures market. But basis will improve (by perhaps 40 cents) and the carry will add another 30 cents. In other words, farmers in the western Corn Belt can likely make 70 cents per bushel holding corn until next year. Even after you deduct 20 to 30 cents for interest, shrink, and electricity, you should still add 40 to 50 cents to your bottom line. If you have 170-bushel-per-acre corn, 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 we get the normal basis improvement by next year -- and keep the current carrying charge in the soybean futures market -- then it can add to our bottom line. Western Corn Belt farmers should make an extra 30 to 40 cents per bushel holding soybeans into next spring and summer, even after figuring shrink and interest. For the eastern Corn Belt farmers, it’s a way to make an extra 20 to 30 cents per bushel. These days, with soybeans below $10 per bushel, it is more important than ever to earn that additional return.
I get this question a lot: "If I have limited bin space, should I store my corn -- or my soybeans?" Like most years, this year you will make the most money storing corn. I also think the fundamentals for corn basis improvement are much better than soybeans as we look ahead to 2015.