Even though signs don’t point to a new-corn futures price of $5 or more per bushel, shifts in basis make it a reasonable target for southwest Kansas brothers Brett and Clint Reiss.
The Reisses farm with their father, Stan, on a fifth generation farm near Plains. They grow irrigated corn and soybeans and dryland wheat and milo. And they’ve already forward contracted about 50% of their corn, thanks to sound basis opportunities. But they’re still waiting on the chance to get beans sold.
“Our soybean basis is usually $1 per bushel under futures, so we need some price movement before making any bean sales,” says Clint.
Growers across the Corn Belt need to monitor price, weather and planted acres movements and wait for a signal to pull the trigger on sales, says Dan O’Brien, Kansas State University Extension economist.
“Seasonal questions and uncertainty about 2014 U.S. corn and soybean planted acres and production prospects during the coming April-May-early June period are likely to provide new-crop forward pricing opportunities,” O’Brien says.
Think 2015 corn, too
The Reisses hope so. And they’ll likely get some 2015 corn sold while they’re at it. “We normally make corn sales to local co-ops and feedlots,” Brett says. “Basis is normally even to up to 20 cents over. But were able to take advantage of a 50-cents over basis with a company out of Kansas City. That was for 2013. This year we are seeing 20-40 cents over.”
“Most of those sales were in February (when futures rallied) and averaged $4.97 for all sales. We also have another 25-30% hedged through puts and calls in an over-the-counter spread.”
OTC spreads enable more flexibility in options situation. In the Reiss spread they have a floor and ceiling for corn futures price movement. “Basically, we have a $4.50 to $5.20 price window guarantee range over a 36-week period,” Clint says.
“We are committed to sell 1,000 bushels every Thursday at the December corn closing price if it is within the price range. We receive the $4.50 futures price for anything sold at $4.50 or under. And we receive $5.20 for anything sold at $5.20 or over.
“We will also get aggressive we can make further sales at $5. We would try to get 75% priced and also buy $5 puts for 2015 corn at that level.”
Revenue protection insurance is normally booked at the 80-85% coverage level, Brett says. “We’re big believers in revenue insurance,” he says. “They’ve saved us a time or two, especially in the recent drought.”
Find the opportunities
O’Brien says growers should “perceive both the risks and opportunities of the 2014 spring planting season for corn and soybeans.
“With prospects for increased planted acreage of U.S. soybeans in 2014, and lower U.S. corn acreage, grain markets will likely be responsive to the degree to which these expectations are met,” he says.
“And to the degree that 2014 South American soybean production prospects are less than earlier expectations, potential volatility of Dec. 2014 corn futures and Nov. 2014 soybean futures will be heightened.”
Planted acreage of 2014 U.S. soybeans may also impact price, he says. “But they are subject to both the success of U.S. corn plantings and the questions associated with South American soybean production and its impact on late spring old-crop and new-crop U.S. soybean prices,” O’Brien adds.
“The risk to those who desire to forward price corn, soybeans or grain
sorghum later in the summer is that no major risks to 2014 production prospects
occur as corn planting nears completion and soybean planting is progressing
in May and early June.”
Summer and fall concerns
There are also worries that U.S. grain markets begin to slide lower from the early summer through fall. “Of course in past years, some of these mid-June downtrends in grain futures prices have proven premature as crop production prospects have been hampered by weather conditions, with prices rallying during mid-late summer,” O’Brien says.
“But absent such a threat of ‘short-crop’ developments, the threat of a down-trending grain market into fall exists, with lesser new-crop U.S. corn and soybean pricing prospects existing, or prices lower than those that would have existed during the spring-early summer months.”
O’Brien says farmers should consider “an old fashioned, nuts and bolts strategy, but with attention to new-crop basis bids. “I would suggest either new-crop short hedges in Dec. 2014 corn or Nov. 2014 soybeans, Hedge-to-Arrive contracts, or forward contracts,” he says.
“If new-crop basis bids are attractive relative to historic patterns, it would be better to use those tools that set futures prices and basis (i.e., forward contracts). On the other hand, if new-crop basis bids are not attractive relative to historic patterns, then the use of HTAs and/or short hedges would be advisable. Put options could also be used for preharvest pricing if options premiums are attractively small.”
Clint Reiss says he looks for a traditional corn versus soybean price ratio in making sales. “ I look for a 2.5 ratio for beans to corn. But more importantly, basis is vital to us,” he says. “It has been the main factor in our corn and soybean sales. Because of our weak soybean basis, we’re nowhere near that at $12.50 to near $5 in futures.”