Market Commentary for 9/25/15
Friday’s bean rally may be attributed to the Brazilian Central Bank propping up their currency, which will likely slow farmer selling there in the short-term. Also, dry weather in Australia is helping support wheat prices. With both beans and wheat prices higher, corn also increased. U.S. farmers aren’t selling going into harvest, which is supportive. Soybeans and corn both closed technically strong, with potential for more upside next week. However, fundamentally it may be difficult, now that harvest is in full swing.
The Chinese visited the US this week and announced they would buy 500 million bushels of soybeans. The announcement was not a surprise to many in the trade as the Chinese consume 60% of the world’s soybeans. The contract details were a bit vague though. The bushels purchased have no guaranteed time frame and no letters of credit have been established. It was a great photo opportunity for all involved, but follow through with commitments will still be needed over the next several months.
Corn yield reports are wide-ranging. It seems yields are higher than estimated in areas where conditions were good, but below estimates where conditions were poor. As harvest moves north, I expect corn yields to improve. Early estimates indicate the national yield could be lower than previously estimated, which would support prices. However, harvest has only begun in much of the Corn Belt. We are 30% done harvesting on our farm in Nebraska. Dryland corn is 35 bushels above APH yields (similar to last year) and irrigated is near normal (which was expected). Moisture levels ranging 14%-19%.
Early bean harvest results are great north of I-90. Some are suggesting the national yield could be increased. However, as the harvest moves southward, the areas in the south where stands look questionable may not produce as well.
What should a farmer do with grain in a commercial facility?
I am a big advocate of 100% on-farm storage because of the flexibility and profit potential options. It’s difficult for farmers to optimize their grain marketing strategy to its highest profit potential without it. But, many farmers don’t have 100% on-farm storage. Often these farmers ask me what crop should be stored at home versus commercial storage. There isn’t a one-size fits all formula, because each farmer has their own unique situation. Farmers need to understand all the costs associated to make that decision.
Example of a common scenario – A farmer may only have 50% home storage capacity with operating loans on most of the crop and little grain priced for 2015.
Keeping grain in commercial storage costs money. Not only monthly storage rates, but finance costs too. Finance costs need to be considered because farmers could just sell all their grain after harvest to pay off all the expenses of raising a crop. Farmers need to be aware of all the costs they face holding grain once its put into storage.
How do I calculate those costs?
First, farmers need to calculate the operating loan cost by multiplying the interest rate to the grain’s cash value at harvest. Let’s assume 5% interest on the average operation loan and today’s cash prices of nearly $4 corn and $8.75 soybeans:
– Corn = 1.6 cents/bushel/month
($4 cash value x 5% interest = 20 cents for an entire year / 12 months = 1.6 cents per month)
– Soybeans = 3.6 cents/bushel/month
($8.75 cash value x 5% interest = 43.75 cents for the entire year / 12 months = 3.6 cents per month)
Second, farmers need to calculate the cost to store grain at a commercial facility. Typically it is around 5 cents/month.
This means that storing grain costs about 6.6 cents for corn or 8.6 cents for soybeans per month in a commercial facility.
But, the price of grain could explode if yields come up short
Obviously this is a very common thought among farmers judging by how little of this year’s crop is already sold. Most farmers don’t realize that the futures price potential is actually irrelevant to grain storage decisions. When the cost of storage at a commercial facility is factored, neither crop makes good financial sense to hold. It would be better if farmers sold the grain for cash value and then rebought the grain “on paper” using futures.
Why would farmers want to do this?
If a farmer sells the grain for the cash value right away, it frees up money that can be used to pay down operating notes and reduces their cost per month significantly by eliminating storage fees and interest charges. Farmers could then buy back the grain with futures, waiting for the futures price they are hoping to get.
How does this work?
To buy back the grain using futures, the CBOT requires about 40 cents per bushel to be placed in the farmer’s account (i.e. margin). Typically, I suggest clients have an additional $1/bu more in their hedge account to cover any additional margin call. This would eliminate any margin calls unless the price dips below $3 for corn and $7.75 for soybeans. (This $1/bu extra is not required upfront, it’s whatever the farmer is comfortable with doing as long as they understand they could be responsible for more margin requirements.) Remember, you just sold your grain for cash ($4 for your corn or $8.75 for your soybeans), so the $1.40/bushel amount should be easily covered, plus you will get this money back when you finally sell the futures. The loan expense equivalent on this amount would only be .6 cents/month ($1.40 at 5% = 7 cents/yr or .6 cents/mo). This is far less than the 6.6-8.6 cents/month to store the grain. Doing this, the farmer still has unlimited price risk, just as they did when they left it unpriced in the bin.
What about basis appreciation?
There is no guarantee the location the farmer delivers grain to at harvest will have the best basis later in the marketing year. Variances from rail shutter loader locations to ethanol or soy crush plants are wide-ranging making basis bids uncertain from location to location throughout the marketing year.
While I have seen basis for both corn and beans to rally 6.6-8.6 cents/month, it has not been that common.
Basically, owning grain on paper versus storing it in a commercial facility eliminates risk and improves cash flow.
Most farmers don’t realize that they have the same risk using a futures account as they do to storing unpriced grain in a commercial facility. So while the basis could improve, the cost of storage and interest of the operating note will likely make the risk to store commercially unpriced grain too high.
Sadly many farmers either don’t know how or don’t use all the tools available to them that would make their farm operations more profitable with less risk.
Next week I will talk in more detail about what crop should be stored at home.
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