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Market Commentary for 5/20/24

Jon Scheve with weekly market commentary made on May 17, 2024

It looks like most corn throughout the US will get planted by the end of May, or the first week of June. So, a repeat of 2019 seems unlikely. The northern corn belt was a concern, but producers there are now telling me they should be done within a few days or by next weekend.


There are pockets between I-70 and I-80 from Nebraska to Ohio that are delayed but should get planted within the next 2-3 weeks. The biggest delays are happening in Northeast Indiana and Northwest Ohio, where farmers have still been unable to start planting.  


While this later planting pace increases the chance of below trendline yields, it is not a guarantee. In other years, planting pace has been this slow, but good summer weather still led to trendline yields. Basically, the weather in July will still determine what the final corn yield will ultimately be.


Why Storage Pays

In a previous newsletter I shared when and why I set basis on my farm. That prompted several questions from farmers on the process I used.


For background, in 2023 I bought puts on much of my anticipated production. I also had some sales on and several options trades that gave me added profit. My final futures value ended up as $5.54 against the December contract. This floor price was mostly set and secured by February 14 of 2023 as this chart shows:

That all seems like a lot of work.

A farmer asked me why do all the work to hold grain after harvest if my floor value was $5.54 and futures at harvest were under $5? 


The reason is that basis at harvest in southeast Nebraska picked up on my farm was trading -35 cents to the futures values as the chart below for October shipment shows:

That means, if I had sold my corn to be picked at harvest, I would have received $5.19 cash value ($5.54 futures - .35 basis value).


Usually, the worst basis of the year is during harvest in October because many farmers don’t have enough home storage and need to move their grain to commercial facilities where space is limited. In my area -35 is common at harvest time. However, once harvest is over, it is very difficult for end users to get farmers interested in moving grain, especially if futures values are low.


As the chart above shows, shortly after harvest was over end users increased their basis bids to incentivize bushels to move.


Which month do you sell futures in?

Another farmer asked me if I make my sales against the December contract and then roll them forward to a future month. Or do I just pick the month I plan to sell grain in when I make my original sales.


Usually, I will pick the December contract because the spread to the other months historically works in my favor as the year progresses. However, some years market conditions will suggest that I should place the trades in the contract months I plan to move the grain earlier in the year.


Just like how futures and basis have their own market movements, so do the spreads. In some years, spreads will be widest in the spring and others it is in the fall. Last year, I waited until late fall and captured 37 cents of premium to store grain waiting for basis opportunities as shown in the chart below:

What about the cost of money?

A question that I receive frequently is if I account for the added interest to store my corn that long?


The answer depends on what I’m comparing my sales to. If someone wants to look at holding unpriced grain in the bin until the day I set basis, then both trades have the same amount of interest costs in them and it’s not relevant. 


However, if I’m comparing my sales and storage price to someone who did not store their grain at harvest then it’s extremely important to look at the cost of interest to store grain.


In October, the futures value for corn was around a $4.95 average and the basis was trading at -35. This means the corn in my bin has a $4.60 cash value. To calculate the interest cost to hold the grain, I take the $4.60 cash value of corn x 9% interest for a short-term operating note divided by 12 months to arrive at a 3.45 cent per month cost for storing grain instead of selling at harvest and lifting my hedges.


That means storing my corn in the bin for 7 months until May, instead of selling at harvest, will cost me 24.15 cents (3.45 cents x 7 months).


Why do you use the $4.60 cash price and not $5.19?

The reason I use the current cash value is because my hedge account will have already captured some of the profit from the drop in futures prices from $5.54 futures I have sold to $4.95 where they were trading. I can take that profit out of the hedge account if I want and pay down any short-term loans I have. Also, by using cash it accounts for where basis values are and where I believe they might go as well.


What was the outcome?

In October, the spread as noted in the chart above, to move my sales from December to May was paying me 24 cents, which would have covered almost all my interest cost. However, I suspected the spread could move wider, considering the large harvest the US was having, so I waited until late November to move my sales from the December contract to the May contract. My hunch turned out to be correct, and I pocketed 37 cents to hold the grain until May, which more than covered the 24.15 cent interest cost to store the grain.


Basically, through market carry I am paid the equivalent of a 13.5% annualized return (37 cents / 7 months = 5.2 cents x 12 months = 63 cents / $4.60 = 13.5%). This means even with a 9% loan I made a 4.5% annualized profit using the bank’s money. And the bank was happy about making the loan. It was a win-win scenario for both of us.


I have heard that some people suggested that for those who didn’t have to borrow money, it would have been better to sell the grain at harvest and put that money into a CD for 5% interest. Clearly making 13.5% is significantly better than 5%.


Plus, these calculations don’t even include the basis appreciation profit from harvest to April. I made another 35 cents in profit from that portion of the trade, which is the equivalent of another 13% of annualized return.


In total, I collected 37 cents in market carry and 35 cents of basis appreciation for a total of 72 cents over 7 months. If I didn’t have a bin payment or operating note, it means I made the equivalent of a 26% annualized return on my investment over 7 months. And for the farmer who does have operating notes and bin payments the market would have paid for both this year.


Farmers can make a lot of additional profit through on-farm storage if they understand how the market encourages them to do so. With current corn prices where they are, it is more important than ever that farmers take advantage of these kinds of opportunities that can help them maximize their profit potential.


If you want to learn more about how to use on-farm storage to turn profits like this, reach out to me.

Jon Scheve

Superior Feed Ingredients, LLC

9358 Oak Ave

Waconia, MN 55387

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