Grain Merchandiser Lingo Explained March 3, 2020
Brian Henry is a grain market analyst and inventory manager for Benson Quinn Commodities, Inc. After the close of trading today, he wrote the following commentary:
The May/July in corn continues to come in. It looks rich, but with no deliveries on a narrow Mar/May and little cooperation from the flat price until the last two days, its spread remains firm. I do not want to buy the May/July at 2 ½. Of course, I always thought the Mar/May was too expensive also. Although I was proven wrong on the Mar/May, it seems like future strength in the May/July will result in better opportunities to either sell basis or buy from the producer. I am not interested in chasing this one either. Maybe, I should be interested.
That right there is a mouthful of grain merchandising lingo! In his position as a grain inventory manager/merchandiser, he looks at the market completely different from 99% of the farmers. In addition to what farmers already watch for marketing, they would be even better marketers if they looked and managed the things Brian is talking about. So, let’s start translating.
The May/July in corn continues to come in.
Brian is referring to the May corn futures price compared to the July corn futures price. Because he listed the May contract first, that is the firmer of the two; the bull or buy side of all spreads is mentioned first when stating the spread (long something and short something).
The “come in” phrase refers to the price difference between May and July corn narrowing and today. In fact, May corn was up 5 ¾, whereas the July was up 5 ¼. The spread narrowed by a half cent. The return to storage, aka “the carry,” was reduced by a half cent from May to July. If you have corn in the bin, this is significant. If you have millions of bushels of corn in the bin like Benson Quinn does a half cent change in the carry in one day is thousands of dollars.
He writes, It looks rich. The spread is unusually narrow (firm) and, therefore, too expensive to buy May and sell July. Two sentences later he writes, “I do not want to buy the May/July at 2 ½.” He does not want to “buy” (initiate) the spread at 2 ½. We know he meant, buy May and sell July, because he stated the May part of the transaction first.
“…no deliveries” means no deliveries on the March corn futures contract, which means those with cash corn supplies want to keep them. This an indication supplies for immediate use are on the tight side and basis is firm or expected to firm.
“…and little cooperation from the flat price…” the “flat price” is the cash price being paid for corn delivered now. It is also known as the “spot price.” The cash price is rising and supporting the nearby futures months.
Brian admits he thought the March/May spread was also “too expensive” the past few weeks, and he was wrong. Today, March corn settled a half cent higher than the May corn, giving us an inverted market. That is to say a “negative carry,” no money to be made storing corm from March to May. Had Brian bought the March/May spread at 2½, he would have made 3 cents as of today, which is big money on millions of bushels. Even though he was wrong about the March/May spread and he can see the possibility the May/July spread very well may do the same, he is not going to buy the May/July, because it is “too rich.” He is not going to “chase this one either.” He did not try to buy the March/May spread with ever-increasing, already-expensive bids (narrow carry) as it firmed in recent weeks, and he is not going to “chase” the May/July spread with ever tighter carry bids.
Farmers often “chase” a falling price by placing sell orders just a little bit above the market, not get the order filled and then lower the sell order a little lower in succeeding days, only to miss getting sold each day
“…the May/July will result in better opportunities to either sell basis or buy from the producer.”
Brian sees the firm basis is supporting the nearby future months compared to the deferred months. He is content to see if basis will get so firm, he will short the basis with the expectation it will weaken after he shorts it and buy cash corn on a weaker basis than when he sells the basis. Or, if the basis and the spread weaken rather than firming more, he will be able to buy cash corn on a weaker basis. Either way, he will make money without chasing the May/July spread now.
How does one short the basis?
Enter into a basis contract for future delivery period without owning the grain. For example, let's say I am not a corn grower, and I do not own any corn. However, I think the fall delivery basis of -18Z (18 under December futures) offered by Cargill's corn syrup plant is much firmer now than it will be in October/November. I agree to deliver to Cargill 100,000 bushels at -18Z. I don't own the corn. I am not going to grow the corn. Therefore, I am "short on my corn supply." Since this is not a forward contract, the futures price is not locked in, but the basis is locked in. I expect to be able to buy corn sometime between now and delivery time at -25Z to -35Z and have it delivered to Cargill at -18Z.
A short position holder means the holder of that position wants the value to decline.