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Market Commentary for 7/9/21

Another week of good weather for most of the corn belt has put downward pressure on prices. Corn prices declined each day this week and is nearly $1 per bushel lower than last week’s market high. While the USDA is unlikely to change the national yield average in the report on Monday, the market seems to be trading a national average yield of 177 right now. The market will be keeping a close watch on rainfall in the Dakotas and western Minnesota over the next two weeks and be waiting for the August USDA report a month from now when national yield is usually updated.

Market Action:

Since the end of last year’s harvest, my entire 2020 corn crop was priced with futures along with half of my 2019 corn crop, which was priced with futures from the previous summer. I had been keeping all this in on-farm storage and was monitoring the basis market around my farm and across the US to determine the best time and market to set my basis.

Within 60 miles of my farm there are:

  • 2 ethanol plants

  • 1 dry mill processing plant

  • 6 rail shuttle loaders

  • 6 feed mills

While these locations are near my farm it does not mean I will necessarily sell to any of them. Usually, my corn goes to several different end users each year because the best basis opportunity for me always changes. To maximize my basis profit potential, I take bids from any location and calculate commercial trucking costs back to on-farm pick up to make sure I am selling my grain to the highest possible price. In 2021 my corn went to 7 different states, with the furthest load travelling 500 miles away.

Trade #1 – Set Basis on Remaining 2019 Corn Crop:

For the last 4 years I have purposely kept 25%-50% of my old corn crop in storage for over a year to try and capitalize on carry and basis appreciation. With our increased storage capacity, we have experimented with different storage lengths of time and prefer holding some corn around 18-20 months.

In summer of 2020 I purposely did not set my basis on 50% of my 2019 crop hoping for better values in late spring 2021. At that time, many in the trade expected a huge carryout and lower prices would come after the 2021 harvest. And historically, lower prices usually mean better basis values as the market tries to encourage farmers to move corn out of storage. Plus, the CME Group had also increased storage rates for delivery elevators, and market participants assumed this would lead to more carry compared to previous years. However, this clearly did not happen and by early 2021 futures more than doubled in less than 6 months and US supply looked tight.

Since my corn was already priced with futures, I was only concerned with basis values at this point. Therefore, on January 12th, I set the basis and moved my remaining 2019 corn out of storage, while it was still in prime condition. The following chart shows the top 2 posted basis bids picked up on my farm of the 15 local buyers available since April 2020. The basis value I sold my remaining 2019 corn crop was -.24 against March futures and is noted by the red X in the top half of the chart.

It may look like I missed the top of the basis market by 10 cents compared to where prices were in late November. However, those basis values are against different futures contracts. This means I need to also look at spreads (i.e., the bottom half of the above chart) to compare the different basis values.

In November I rolled my December futures forward to March and collected 7 cents of carry as noted by the red X on the green Dec/March spread line. So, while I might have missed the best basis value by 10 cent the 7 cents of carry profits need to be considered to accurately compare the different basis values. Therefore, I only missed the highest possible posted basis level by 3 cents.

Also, since I waited to set basis from last summer, I rolled my sale from the September contracts to the December contracts and collected 13.25 cents profit noted by the red X on the purple Sep/Dec line.

In other words, by holding my grain from last summer until this spring I collected 20 cents total carry profit from the spreads and secured a higher basis value than what I was able to find the previous summer.

Cost Of Money

The interest cost to store grain should also be considered in the equation above. The average corn price from June to January was $4. Assuming 4% interest on an operating note, means it costs me 1.3 cents per month to hold grain waiting for better basis values which includes margin call costs too. This means it cost me 10 cents/bushel in interest waiting 6 months to set basis.

So, despite the market not performing as I expected, I still collected 10 cents profit (20 cents carry minus 10 cents interest and margin call costs) and set my basis at nearly the highest available posted level during that timeframe.

Trade #2 – First 2020 Corn Crop Basis Trade:

Three weeks after the above basis trade was made, the March/May corn spread began to invert. Market inverses indicate the market wants grain now, and it is not profitable for hedgers like me and commercial elevators to keep holding the grain in their bin while rolling their hedged positions forward.

Historically, while basis values in inverse markets can rise significantly, it is not a guarantee. Since the market rally was largely caused by the dramatic and unexpected Chinese buying of US corn, and no one knew how long that would last, it seemed prudent to look at minimizing basis risk for my operation in early February.

On February 4th I began receiving bids from multiple grain buyers 15 cents higher than any local bid in my area (shown by the red X in the top half of the chart below). While this was only 4 cents better than my 2019 crop’s basis trade 3 weeks earlier, it was much better than the local bids available at that time.

With higher basis bids picked up on the farm, local basis bids dropping, and futures turning into an inverse (note dotted white arrows), I reduced my basis risk by selling 25% of my 2020 crop. I still collected 7 cents from the Dec/March spread, so the basis value I traded matched the highest possible posted value available for the year to that point. It was also comparable to basis values I have traded the past few years.

This left me with 75% of my 2020 basis to set, which I will explain how I traded next week.

Jon Scheve Superior Feed Ingredients, LLC

9358 Oak Ave Waconia, MN 55387

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