Market Commentary for 12/12/14
There were few surprises in the latest USDA report. This year’s carryout dropped slightly, but world corn supply increased. Final yield results and harvested acres will be the highlight in the January report. Until then, corn will likely hold a very tight range.
Christmas came early for unpriced corn farmers today. Corn finally broke through and closed above $4 on the March futures. Largely this was due to rumors from China that they plan to resolve import issues for US DDG. It’s not certain that China will take US corn yet, but they certainly could. That would help increase corn usage in the US. Also, the Ukraine cancelled some winter contracts due to logistical issues (but will still likely sell corn again this spring). $4.25 March futures is a possibility at this point, especially if farmers continue not to sell through December. The market certainly feels bullish futures right now.
The market is buying acres for 2015 with the current bull run. The corn bean ratio is 2.36:1. Under 2.4:1, it favors planting corn over beans for many producers.
What will farmers do in January?
The USDA report showed carryout lower than expected. However, the market stalled because of the large expected South American crop forecasted for February. Reports show farmers selling as cash prices neared $10 throughout the Midwest. The bean front-futures range has been between $10-$10.50, which will likely continue through the final growing stages of the South American crop next month. Can a corn rally pull the beans higher? Would DDG working into China and thus cutting soymeal be bearish bean prices?
Corn Basis Trade
Last week I wrote about how farmers need to trade their CBOT price and basis price independently of each other. Most farmers don’t realize large end users are more concerned with basis levels than CASH levels when they buy a farmers grain (another reason farmers should learn to trade this way). So, if most end users are doing this, why are producers doing something different that is inherently higher risk?
This week an end user approach me, wanting to get some coverage on for March and July, they offered a price $.22 higher than my local grain elevator’s bid and $.18 higher than any other bid within 65 miles of my farm (freight costs included).
Several things need to be considered to understand if this is the right trade decision for my farm (and my clients’):
Will CBOT prices continue to rally into spring?
The chance of the basis widening (or narrowing) in value is extremely high, which would be risky to my current position. Conversely, if the CBOT would drop significantly the basis could improve. But, would it improve more than the nearly $.20 premium of this trade?
The price offered was -$.15 versus the March futures for March pickup and -$.15 versus the July futures for July pickup. These prices were $.05 less on basis than what I received last year for my crop, which turned out to be the highest basis price of the year. This year my goal was to repeat the same trade as last year. However, this year there is so much more corn available for the market, which will eventually need to be moved, that I feel basis does not have the chance to rally much more from this point.
After evaluating my choices, I selected the more prudent and risk adverse route, to make this trade. I chose to sell 100% (10% for March to core my bins and 90% for July) of my corn basis this week. Additionally, several of my clients chose to join me on this sale as well.
Is it smart to put all of my grain into one trade?
Obviously from a numbers and historical trend perspective this seems like the smartest solution. But, also input from industry insider friends boosted my confidence. Many suspect basis won’t move more than $.20 for the year and would also have sold if given this same opportunity. Another indicator this was a shrewd trade (with current knowledge), I am unable to repeat it right now. I’ll evaluate next August, if I should have waited.
How does this work with my current trades?
On 11/6/14 I rolled my grain from the Dec to the Sep futures for a $.35 spread. With the trades above I have to roll the futures back to the Mar at a $-.20 spread and back to the Jul at a $-.06 spread (includes commissions). Thus, I was paid $.12 to carry the grain from harvest until after January 1ST and $.29 to hold the grain until July.
Which is better, a March or July Sale?
The answer is not clear cut, each farm operation is different. The clients included in this trade made the decision that was best for their operation. The basis level was the same for both March and July so the difference is the spread between the March and July futures.
When I made the trade this week, the spread was at $.15 carry (meaning the July was a .15 premium to the March). March to July is a 5 month spread. The value of the corn sold for cash is about $4. With a 5% operation loan, a farmer is looking at $.08 interest expense to hold the grain until July ($.016 monthly expense). This means a net gain of $.07 profit.
I can’t say whether the $.07 is worth it to another farmer. From my perspective though, it is. With $.07 additional profit, considering average national yield, it is over $12 per acre profit. Or in other words, a 500 acre corn farmer would receive $6,000 more. If a farmer does not have to borrow any money for their operation holding grain until July is like buying a short term CD that is paying 5% interest, not a bad deal in this economy.
2014 Corn Crop Final
With this basis trade I have completely finished marketing my 2014 corn crop.
Here is the summary for my farm:
CBOT average price $4.78
On farm pickup basis $ -.15
Average spread carry profits $ .28
Expired options and spread profits* $ .08
Average CASH price for 2014 corn $4.99
I strongly recommend all farmers break their trades down by the above line items to determine if they are fully capitalizing/optimizing their results. Most don’t and are leaving money on the table or don’t fully realize all the options they have (not to mention the increased risk they are taking on). Of course, reach out to me if you want to talk about working together in the future on similar type trades.
*The expired options were the combination of all options throughout the year that expired as well as the spreads that I put on when I shifted some of the bushels from futures month to futures month that were not the specific carry trade. The total dollar amount was added together and all commissions for trades subtracted and then divided by the entire amount of bushels produced on the farm.
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