Just weeks prior to harvest, I attended a conference of crop insurance agents and market advisors. Several people told me they had clients holding 2016 crop (some with 2015 crop). With harvest looming I asked, “What are they waiting for?” The response? “They are waiting for the chance to sell $4 corn.”
$4 corn – is that your number too? With harvest bids of $2.90-$3.00/bu. (basis of 45-55 cents under) in northern Iowa and southern Minnesota, $4 corn sounds like a reach. Well, maybe I can help. Let’s talk about how to get $4 for your 2018 corn crop.
The search for $4 corn will be a three-step process that demands tactical action before and after harvest.
Price corn with a sale of Dec’18 futures above $4.10/bu. Yes, I know, Dec’18 futures have been trading in a range of $3.90-4.00 since mid-August. However, we have to go back to the Dec’06 futures contract to find the last year when you did NOT have a shot at selling $4.10 new crop futures in the delivery year. Let’s assume a harvest basis of 50 cents under the December contract at harvest – your sale of $4.10 corn futures translates to $3.60 cash corn price at harvest in 2018.
At harvest, place the corn into storage and roll the hedge forward to the Jul’19 contract at a 25-cent positive carry (the Jul’19 contract trading 25 cents higher than the Dec’18 contract). The Dec/Jul carry has been very close to, or exceeding, 25 cents in each of the last ten years. The exception was the drought year of 2012.
In the spring of 2019, unwind the hedge (i.e., buy back Jul’19 futures and sell cash grain from storage) when the basis reaches 35 cents under the Jul’19 contract. Is 35 cents under a reasonable basis goal? Weak basis has been a challenge in recent years, but 35 under July was a possibility in northern Iowa/southern Minnesota in each of the last few years.
A quick recap of the process: A sale of $4.10 Dec’18 futures leads to $3.60 corn by harvest. Rolling your hedge to the Jul’19 contract adds 25 cents of carry. Basis improvement from 50 cents under the Dec’18 to 35 cents under the Jul’19 contract adds another 15 cents.
Viola! $3.60+0.25+0.15=$4.00 cash corn!
Are there risks?
Yes - nothing is 100%! What if you don’t get the chance to price Dec’18 futures at $4.10? Possible, but the price is currently 15 cents away and we have time. The second risk is a Dec’18/Jul’19 carry of much less than 25 cents. This could happen in a short crop like 2012. In this case, be happy you chose to diversify your pricing decisions and did not price everything at $4.10 Dec futures. The drought scenario means higher prices for the corn you did not price.
There you have it – three steps to $4.00 corn for the 2018 crop. You have neighbors who have done this in each of the last three years, when $3 corn was the rule at harvest. All it takes is a plan and a commitment to act when the opportunity is present.
How to get $4 corn – do the math
$4.10 Dec’18 sale of corn futures
-0.50 harvest basis
$3.60 harvest price
+0.25 positive carry from Dec to July
+0.15 basis improvement (-35N vs -50Z)
$4.00 corn by the spring of 2019!