For many months, the futures market for corn has been inverted – at times more than $1/bu. – from the July 2011 to December 2011 contracts. An inverse from old-crop to new-crop futures is not rare. They occur in crop years like 2010-2011, when ending stocks at year-end are tight.
Inverted markets present challenges. Corn buyers try to minimize stocks (but don’t run out) of high-priced raw materials. They also present challenges for corn producers as they consider how long to hold high-priced old crop in storage, and think about pricing new crop at a discount to current prices.
Let’s review the record for old-crop/new-crop inverses in the corn futures market since 1990. Seven years met my criteria of having at least a 5¢ inverse in early April (see table). I have three questions concerning these years. First, how were these inverses resolved (i.e., did new-crop prices rise to meet higher old-crop values, or vice versa)? Second, how quickly did the price transition occur? Finally, what does the inverted year say about new-crop pricing opportunities?
Howwere the inverses resolved? In each year, cash prices declined sharply from April to October. No exceptions. The six-month decrease in cash prices ranged from 31¢ in 1997 to $1.59/bu. in 2008.
Something that does not show in the table is the timing of the high, which occurred before the end of June in each year, except 1996 (first-half July). For holders of old-crop corn, the 11th commandment of grain marketing rules: “Thou shall not hold unpriced corn (or soybeans) in the bin beyond July 1.”
How quickly did the price transition occur? The transition from high old-crop prices to low new-crop prices was anything but gradual. In these years, I found a three-week period when most of the price decline occurred. In 1994, for example, corn prices declined nearly 50¢from mid-June to early July. Would you like a more extreme example? Try 2008, when cash-corn prices declined $1.80 from late June to late July.
Don’t get complacent. You might think, “What’s the rush? I’ll price that corn next week.” The record is clear: When the adjustment begins, it happens quickly. By the way, with the exception of 1990, the transition to lower prices occurred in late June or July (the 11th commandment rules).
What about new-crop pricing opportunities? In an inverted market, by definition, the opportunity to forward contract new-crop corn in April will be at a discount to the nearby price. However, in these inverted years, the actual price in October was even lower than the discounted opportunity in April (see the last column in the table). No exceptions.
No exceptions? I wish marketing corn was that easy. Despite the results shown by these years, I can assure you that nothing is 100%.
But the tendencies are strong, and I’d go with the tendencies. Make sure the bins are empty by the end of June. Get your new-crop bushels priced by the same time, up to a level consistent with your insurance coverage.
Still worried about the upside? Buy call options on the December contract. You reply, “But call options cost money.” According to the record for inverted years, so does holding old crop past the end of June. Ditto for delaying sales of new crop.
Inverted markets present challenges.