Jon Scheve with weekly market commentary made on August, 18 2023
It looks hot and dry for the next two weeks. Corn might be far enough along that it will escape with only minor damage. Beans however could be facing some reduced yields if there isn’t some relief in a week or so.
Global Corn Production Uncertainty and Export Demand
There are reports that China has had some corn production issues due to excessive rain. Estimates indicate a 3% crop loss, or 300 million bushels, which could mean increased global export demand.
However, this may not be enough to raise prices. Brazil’s second corn crop this year looks to be 400 million bushels bigger than originally expected, and Argentina is expected to produce a normal crop in 2024.
Plus, Ukraine’s corn shipment capabilities continue to have an uncertain future. While their corn yields are expected to exceed last year’s production, moving grain out of the country could be an issue if Black Sea routes are closed. If Ukraine does manage to produce over one billion bushels as is currently forecasted, only 33% can probably logistically be moved over land to the west or out of other river facilities at this point. That could mean up to maybe 700 million bushels off the world market in 2024 in the worst-case scenario.
The USDA currently has exports for this year up nearly 600 million bushels from last year. It seems possible that the US and Brazil could offset any additional Chinese corn needs or if the Black Sea corridor remains closed.
This could suggest that prices may not rally without some kind of production issue in South America in early 2024 or the US next summer. There are still a lot of wildcards especially with the war in Ukraine, but corn demand may face a big struggle for the next 8 months.
Market Action – 2022 Corn Crop Spread Trade
Last week I discussed how I set my 2022 corn basis.
35% against December futures for early harvest shipment
15% against May futures for April shipment
50% against July futures for June shipment
At harvest, I only had 10% of my crop priced with futures. I offset that 10% of futures against the 35% of basis I had set for harvest shipment. This left me with 25% of my crop with basis set, but the futures for that grain were still unpriced in the form of long futures in my hedge account.
What Does This Mean?
Since I have a hedge account, I can set basis and do what is called a “futures exchange”. This means my grain buyer gives me futures at the same price that they will use to fix my basis trade to, and then will send me a check for my grain. If I have any short futures positions from sales in my hedge account, they will be offset first in my account. If I don’t have any futures sold, then I am left with a long position in my hedge account.
Why Would You Do This?
There are several reasons why I prefer to take on this type of long position in my hedge account and set the cash price of my grain:
It allows me to get my money as soon as possible for the grain I’m delivering, which then stops the cost of interest on any operating notes I might have on the crop.
I can eliminate any credit risk I might have with an end user that I’m selling to.
Some buyers will not allow me to roll my basis contracts forward in an inverse market.
Some end users will not let me leave my contracts unpriced after the grain has been delivered.
This is the same thing as a farmer who sets their basis with a buyer but does not set the futures value while they wait for potentially higher prices. However, with my plan I get paid immediately after delivery. Granted, there are some end users who will give a cash advance on a portion of the unpriced delivered grain, but I have not seen that practice widespread in the industry.
What Did You Do Next?
Over the previous two years, when corn was in an inverse market, prices rallied into spring as the export market heated up. Suspecting a spring futures rally like this could happen again, I rolled my long December positions on that 25% of my crop forward to the March contract and took a 2.5 cent loss on the trade. The chart below shows the spread between the December and March futures and where I made this trade.
The spread, or the futures value difference between contract months, ranged between a 1.5 cent to 7.5 cent cost to roll a long position forward between harvest and late December. But with that 2.5 cent cost I gained another 3 months to see if corn rallied higher.
Rolling My Position from March to May
Before the March contract went into the delivery period at the end of February, I wanted to roll my position forward to the May contract because futures had not rallied enough that I wanted to sell yet. The March to May spread had been ranging between a 1.5 cent loss to a 3-cent profit to roll a long position forward since harvest. I waited until just before the March contract went into the delivery period at the end of February, at which time I collected a 1.25 cent profit. See the following chart.
Rolling My Position from May to July
In April I set basis on another 15% of my production against the May futures contract. This meant I now had 40% of my crop’s basis set against the May futures. Since futures had not rallied as much as I had hoped by late April, I again rolled my long futures position forward, this time to the July futures contract as seen in the chart below.
The May to July futures spread had been trading at a 5-cent inverse since harvest, but 4 months later it spiked to a 45-cent inverse. So, I rolled my long positions from the May to the July and collected a 39-cent spread profit. With all the spread trades factored in, I collected nearly a 38-cent net profit on 40% of my basis contracts. As I shared last week, my average basis value for the 2022 crop was +46 cents picked up on my farm. With the addition of this spread profit across all my basis contracts, it means I’m left with a basis value of nearly +62 cents now against the July futures contract picked up on my farm. I still had 90% of my futures to set on the 2022 corn crop, but the basis and spreads were now set. Reviewing the Spread Trades with Hindsight From a pure profit perspective, I should have set all my corn basis in November at +60 on the December futures. Then I should have waited to roll the long futures position forward to March, then May and finally the July contract to capture almost 38 cents of spread profit. This would have been the highest basis level of the year and would have saved me 6 months of interest on my operating note too. While it would have been the most profitable decision, it would have also been logistically difficult, because I was moving my bean crop at that time. However, setting all my basis in November would have added risk to my operation with what I knew at the time. The December / July spread last November was only at a 5-cent inverse. If the spread had not widened out and if basis had spiked in the summer like it did the previous years, the better decision would have been to wait. One could even argue setting my basis in April would have been better as the profit was about the same and the risk was much lower with the spread. Most of my decisions this year were made because I had not set the futures value on my corn. Had I set futures earlier in the marketing year, the basis trade outcomes would have been much different, and I would not have made as much, if any, money on the spreads. This Sounds Very Complex Inverse markets, where the current futures months are higher than the following month, are very hard to trade and need to be handled differently than the usual corn carry market. Many grain sellers can become complacent in an inverse market, which can be a mistake, because they could easily take $1 per bushel less on their cash corn without fully realizing it. If your grain marketing strategy does not take into consideration basis AND spreads, you are severely handicapping yourself. Next week I will share my final 2022 corn crop futures sales.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com