Jon Scheve with weekly market commentary made on May 3, 2024
Delays in planting across parts of the corn belt sparked a rally in corn last week. If a large portion of the crop isn’t planted over the next two weeks, futures could continue to rise. However, if there seems to be enough opportunity for farmers to make significant progress in planting, then the market will likely pull back.
Market Action – Setting Corn Basis on the 2023 Crop
I have 100% storage capacity for all my crop production on my farm. This helps with harvest logistics and allows me to maximize profitability from more basis opportunities and market carry.
Within 60 miles from my farm, there are 2 ethanol plants, 6 feed mills, and 4 rail shuttle loaders. Since I never know which location will have the best bid each year after harvest, HTA (Hedge To Arrive) contracts are never a profitable option. Usually, I can even get a premium to what my local markets are bidding, if I sell my corn picked up on the farm and let someone else haul it away, which can sometimes be up to 500 miles. I get these premiums by being flexible, using futures to hedge, and storing all my grain at home.
This year on April 2nd I set basis on my entire corn crop at 0 against the May contract for April shipment. This is shown on the chart below:
The green lines represent the 3 best bids available in my area. Note, the commercial freight rates to move the grain to each location are subtracted from each bid, so I can compare all bids equally picked up on my farm.
This year the best bid was for the grain to be picked up on my farm and hauled outside of my immediate area. I don’t know where it’s going, and I won’t be hauling it. All I have to do is load the trucks when they come.
The basis value I received was the best I saw for the year. While the chart does show a bid for 5 cents higher in November, that was only available from one buyer for a 5-day shipping window over Thanksgiving weekend. I couldn’t find a truck to haul during that time period. Plus, I didn’t want to set my basis in November, because the bid was against December futures, and I planned to have my sales set against May futures.
Why Does That Matter?
The spread between futures contracts is how the market pays for someone to hold the grain until it is needed. At the end of November, the spread was increasing a lot because the market had too much corn that needed to be priced from all the harvest delivery.
This chart shows how quickly the spread increased to incentivize more grain shipment later in the marketing year:
I moved my hedges from the December contract to the May because at the end of November I could collect 37 cents to basically store my grain until April or May.
Did You Have to Set Your Basis in April, Or Could You Have Waited Longer?
I could have waited longer, or even rolled my hedges from May to July, hoping for better basis values in the summer and collecting even more for storing it.
Why Didn’t You Wait?
I was able to procure a bid of 0 basis, picked up on my farm, which was 10 cents better than any other bid in the area. A 0 basis, picked up on my farm, was also my goal for the year and it fell within the ideal timeframe I had set for myself to set basis over the winter.
Plus, I knew a lot of farmers still had unpriced corn in their bins. This meant any futures rally would likely be met with farmers selling cash corn. An increase in cash corn sales would likely mean end users would start lowering the basis. And even if basis did manage to go higher for some reason, I wasn’t sure the increased value would be enough to offset my monthly interest cost to wait longer.
I won’t know until mid-summer if I made the right decision, but I’m happy my goal was hit, and I’m finished marketing the 2023 corn crop.
Where Does This Leave Your Final Price?
Between my futures sales and my options strategies, I had a $5.54 December futures value. I then collected an additional 37 cents when I rolled the hedges from December to May, which gave me the equivalent of a $5.90 May futures value after all commissions. With a 0 basis value on my farm in southeast Nebraska, my final cash value for all my 2023 corn is $5.90.
Obviously with cash corn in my area trading near $4.50 right now, I’m extremely happy with my final 2023 corn price.
If you would like to understand more about how to protect downside risk and use storage to increase profits for your operation, please reach out to me.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387