The game has changed. After months of fighting for a dominant position, market bears took control of the corn market in July. Now harvest looms, and you need a game plan to deal with lower prices. How should you price new-crop corn and soybeans? Let’s look at carrying charges, basis and seasonal price patterns after harvest.
Carrying charges: Large and positive carrying charges – deferred futures contracts trading at a premium to nearby contracts – have returned to the corn market. Positive carrying charges are an incentive to store grain at harvest and sell the carry in the market with a futures hedge in the May’14 or Jul’14 corn contracts. This is a conservative strategy that should add 20-30¢ to the price, protect against lower prices and defer income to the new year. All good, but the basis situation is not cooperating.
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In the soybean market, carrying charges are flat – there is very little difference in the price of the Nov’13 contract and the March, May and July contracts in 2014. Selling the carry is not an option.
Basis: During the past two harvests, I proudly declared myself a basis bull in the corn market. By the summers of 2012 and 2013, high and positive basis levels made me look smart. As the harvest of 2013 nears, basis levels remain strong, but next summer’s basis outlook is not so good. With ending stocks of corn projected close to 2 billion bushels, I see no reason to expect high basis levels next spring.
This basis situation throws a monkey wrench into my “sell the carry” strategy for corn. Even with a large carry of 25-30¢/bu. (from the Dec’13 to the Jul’14 contract), does it make sense to sell the carry when the harvest basis is 10¢ under the Dec’13 contract (southwest Minnesota/northwest Iowa delivery points), and the basis in June might be 25-30¢ under the Jul’14 contract? No, it doesn’t.
Soybeans basis levels look remarkably normal for harvest with little reason to believe they will be particularly strong next spring.
Seasonal price patterns
If selling the carry is not an option, your choices quickly narrow. Harvest sales are a good choice for those who priced early, but no fun for those who didn’t. The other choice is to store grain and hope for higher prices in the months ahead. What are the chances that cash prices will be higher next spring and summer?
This chart’s patterns indicate that the chances for higher prices next spring are good. Since 2000, corn prices and soybean prices have risen an average of nearly 20% from harvest to early summer. These are, of course, averages and the averages are skewed by several remarkable years like 2003, 2007, and 2010. But it is a fact that over the last 12 years, the price of corn in has increased from harvest to spring in three out of four years, and five of six years in soybeans.
Seasonal price patterns make the choice to store unpriced grain look easy, but nothing is easy if the market bears are in control.