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This Week’s Market Forecast from Minnesota Jon…

Jon Scheve
Jon Scheve

 

 

 

Market Commentary for 11/21/14

 

Freight

Many predicted significant difficulties moving this large crop during Oct-Dec, which would cause basis prices to collapse.  In Sept elevators even paid up to $4,000/car or $1/bu for the rights to have cars show up at their elevator in anticipation.  This week the price of cars has since dropped to $0/car, which is baffling elevator managers and traders. 

 

This year basis didn’t crash because farmers didn’t sell much grain.  In addition to that, farmers have been building more home storage (elevators too).  So, with this additional storage farmers weren’t forced to sell when prices declined before harvest.

 

This freight issue is helping the Dakotas’ basis the most, which was expected to fall apart by many in the industry. US corn is still a little expensive for exporting, but the pressure is off for now.   

 

Corn

As mentioned above, the corn board is holding strong because farmers aren’t selling.  If this continues, $4 may be possible.  Basis has stayed strong, which indicates grain movement is not overwhelming the market.  A trading range of $3.60 to $3.90 is likely through Thanksgiving and possibly Christmas. Long-term there is too much grain and the current price won’t make exporting feasible.  Corn may test the lows again to drive up demand overseas.

 

Beans

Many traders are comparing the 97/98 crop year to this year (13/14) because of the similarities.  Both years had a big crop after a small one and export issues following the latter year’s harvest.  In 1998 the market topped out in November (in 1998 it was on the 11th, this year it was the 12th-so far) and drifted lower until June, losing 20% of value.  If the same thing happened this year, it would mean prices in the upper $8’s. 

 

Fundamentally and technically bean prices should not be at current levels.  These recent prices have shocked many day traders, causing huge losses while farmers should be reaping the benefits.

 

As always, I recommend farmers have price goals for old/new crop beans with orders in place to reach their objectives.  Avoid trying to time the market.  Long-term beans don’t look friendly.  Without a sound marketing plan, the risk to farmers’ bottom lines is significantly higher than they realize.

 

Options Expiration

Today the Dec 2014 corn options expired.  For all those keeping score, following are my positions.

 

1)Options I sold for premium but expired worthless today:

  • On 7/10/14 Corn was just under $4.00 on Dec futures. I sold a Dec $4.00 call for $.18. As we are not above $4.00 I didn’t sell any corn and I just keep the $.18.
  • On 5/7/14 Corn was at $5.10 on Dec futures. I sold a Dec $5.20 call for $.34. Again I didn’t sell corn and I keep the $.34.
  • On 1/16/14 Corn was under $5.00 on Dec futures. I sold 2 – Dec $5.00 calls for $.20 each. Again I didn’t sell corn and I keep $.40.

All of this added $.04 to the bottom line of my entire 2014 production (each trade represented 5% of my crop). Obviously I would have been better off selling corn each time instead of options, but that is hindsight. I’m glad I did something instead of nothing.

 

2) Options that did get exercised:

  • On 10/9/14 Corn was about $3.50 on Dec futures. I sold a Dec $3.50 call for $.095. That means I sold corn at $3.50 + $.095 = $3.595 Dec futures sale.
  • On 4/19/13 Corn was around $5.40 on Dec futures. I bought a $4.50 put and sold a $7.00 call for even money. I get to sell my corn for $4.50 and the call expires worthless.
  • On 3/15/13 Corn was $5.43 on Dec futures. I bought a $5.00 put and sold a $6.00 call for even money. I get to sell my corn for $5 and the call expires worthless.

Again in hindsight, I should have just sold the grain and done nothing else.  But at the time, that was a hard call to make. I had protections put into place if prices dropped significantly and still allowed for some upside potential.  The significant risk reduction is always worth it to me and I’m still pleased with the outcome.  This shouldn’t be considered an example of the “wait and see” approach working. The wait and see approach does sometimes work, but sometimes it doesn’t.  I want to be comfortable with all market conditions.

 

3) On 9/19/13 I bought $4.50 Dec ’14 puts (giving me the option to sell grain at that price) for $.22 as a protection for my 2014 crop. (Dec corn was still around $5.)  Then as I continued to sell my 2014 crop through the year, I left the protections in place for 2015’s production.  Today these puts expired, and I am short futures at $4.50 and need to roll those to Dec 2015 to officially lock in the price for next year’s crop. Last week I rolled those anticipated sales for $.45. Thus I’m now sold for 2015 at $4.71.

 

More Benefits of Storing Grain

In my continued educational series on storing grain, following are three often heard comments from farmers against storing grain and my rebuttal.

 

I don’t have time to haul grain in the summer.

I certainly understand the value of farmers’ time, especially in the summer.  Therefore, for those short on time or don’t want to haul their own grain, I recommend hiring an outside truck firm.  When farmers factor/include the cost of their time, it is only an additional $.05/bushel to hire someone locally to haul their grain for those that do not have enough time (or a truck).

 

Do the numbers you show account for the double transport cost of hauling grain to the bin at harvest and then again to the elevator in the summer?

Short-term no, long-term yes.  In my long-term plans (7 years+) I will capture this expense back by having free storage once my bins are paid off.  But, there are other “savings” that I’m also not including.  For instance, not having to wait in line to dump grain at the elevator or having to stop combining because the elevator is closed (reduced hours/weekends/etc).  I can’t say if these two factors completely cover the cost of double transportation.  One must look at all the factors of their own farm operation to answer that.  But, typically the double transportation costs are not significant enough to justify not having home storage.

 

Isn’t shrink an issue?

Yes, but with good grain handling management it doesn’t have to be.  If moisture is above 15%, farmers will be penalized by the elevator for bringing in wet corn.  Conversely, if farmers bring in too dry corn (<15%) farmers also take a penalty in the form of shrink loss.  On our farm we have been using the new bin technology for four years.  We have found, when monitored correctly, corn shouldn’t shrink more than 1%. With corn values $4-$5/bu, this amounts to about $.05/bu.

 

To recap, while there are some expenses to home storage, the potential benefits/profits outweigh them.  Farmers can make substantially better margins long-term when they make the investment to store grain at home.  You don’t even have to change where you sell your grain.  A well-built bin will last 40-50 years. Even in a worst case scenario, all the extra costs associated will be paid off in 10 years instead of 7.  Think of all the added profits in the future by making an bin investment now.

 

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