Jon Scheve with weekly market commentary made on November 10, 2023
Thursday’s USDA report indicated that last summer’s corn objective yield models might have been more accurate than the subjective based weekly reports after all. This could suggest the current average corn yield, estimated to be nearly 175, may increase again in the January report, which would not be bullish news for corn. For beans, the USDA only increased the yield slightly and demand remained unchanged. If the estimated export numbers can be attainted, the bean supply will be tight and supportive of prices. Moving forward both the corn and bean markets will be watching Brazil’s weather the next several months as it is the critical window for crop development. So far, the weather has not been ideal there, but it is still early and growing areas are spread out over a larger area than in the US. Market Action – Capturing Carry in the Soybean Market Ten years ago, I built grain bins to store my beans during harvest. I did this for several reasons:
I did not want to wait in line during harvest at the local elevator or processor.
Local basis bids tend to be lowest during harvest, and I can usually increase my profits by holding my grain and setting basis later in the year when local demand is higher.
It allows me flexibility to sell to any buyer with the best basis bid picked up on my farm.
Since I know I will not ship beans out of my bins in October or November, I need to “roll” any sales made against the November futures contract forward. As I have previously shared, I priced 25% of my beans on the November contract at $14.04. On September 28th I “rolled” those sales from the November to the January contract and collected 20 cents carry. What Does This Mean? Since I was short November futures in my account at $14.04, I bought back those futures for $13.10 and then sold January futures for $13.30 at the same time. This roll type of trade leaves me with a 20-cent market carry profit and my hedge account has a $13.30 sale on the January contract. But The January Sale Is Lower Than Your Original Sale Sometimes farmers get hung up on “rolls” because the new sale value is lower. Therefore, they think they have lost money, but they have not. Following is the math behind the trade:
$14.04 November sale minus $13.10 buy back = 94 cents profit
94 cents profit + $13.30 January sale = equivalent to a $14.24 January sale
Basically, because the spread trade had 20 cents profit in it the trade added a 20-cent carry premium to my original $14.04 November sale.
When rolling sales forward, the actual prices in the trades do not matter. Only the spread between the values matter. So, even if the prices in the roll trade happened at $15 and $15.20, the market carry profit would have still been 20 cents and like I sold $14.24, even though the market is higher. This also illustrates why it is very important to keep detailed records of every trade in a hedge account during the marketing year. Without it, farmers can forget what or why the sales in their account are the values they are. Why Did You Sell the January Contract at the Same Time? Why Not Wait for a Rally? The short answer is that would have been a pure speculation play. The market was giving me a guaranteed 20-cent profit, and I took it. I handle my stored grain, that is priced with futures, like elevators do. I keep the grain hedged, collect the carry, and minimize my risk. To use a baseball analogy, this strategy is like getting a base hit every time. I may not have a chance for a home run, but I also know I will not strike out waiting for a market rally that might not happen. Factoring The Interest Cost to Hold My Grain The operating loan interest cost to not sell my beans right now is 9.75 cents per month. To calculate this, I use a 9% operating loan interest rate x $13.00 cash value beans / 12 months. This means the 20-cent market carry covers my loan interest expense and commission charges on the trade for the next two months. Now I can essentially hold my grain at home for free, while waiting for better basis values down the road. Why Roll to the January Contract? The spread between January and other contract months like March, May or July did not offset the interest expense to hold my grain that long yet. That could certainly change over time, so I will continue to reevaluate the market carry available in the next few months to determine what is best for my operation. Did You Collect Carry On 100% Of Your Beans? Unfortunately, carry can only be collected on grain that is already sold with futures. I have not set the futures price on 75% of my beans yet, so I cannot collect carry on this portion of my crop until I do so. If you would like to know more about this type of marketing strategy or the basis opportunities available in your local market for corn and soybeans reach out to me.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com