A corn market rally is hard to justify

first_imgShare Facebook Twitter Google + LinkedIn Pinterest By Jon Scheve, Superior Feed Ingredients, LLCThere are so many negative factors affecting the corn market right now, it’s difficult justifying any market rally. Weather is always a wild card for the market in either direction especially this early in the season. The funds have a record short position right now, but farmers are really long, so a rally isn’t guaranteed. While no two market years are ever the same, I find it’s helpful to review historical trends to gain perspective or insight.From this point forward in the year the market has eventually seen a nice rally over the last 4 years:2018 — December corn posted a low on 4/20, then rallied 27 cents until 5/242017 — December corn posted a low on 4/21, then rallied 38 cents until 7/112016 — December corn posted a low on 4/25, then rallied 70 cents until 6/172015 — December corn went 20 cents lower from 4/20 until 6/15, then increased 70 cents by 7/11Finishing up my final 2017 Cash SalesLast August I still had 35% of my 2017 crop, stored at home but hedged with sales against the September futures. Instead of setting basis at -.43 picked up on the farm last summer, I continued to store my grain at home and collected market carry, hoping for better basis in the spring. To capture the carry, I “rolled” the futures I had sold against the September to December futures and captured 15 cents of market carry. Then in late November I rolled those sales forward again to July ‘19 futures, picking up another 27 cents of market carry profit.Last week I discussed how I made a basis sale at -.28 against the May. Instead of applying that sale to the ’18 crop I’m actually going to apply it to what I had left of the ’17 crop.With the basis sale being against the May futures, I need to account for rolling the spread from July back to May, which was at a 9-cent spread. Because the market is in a carry, it means the 9-cent spread between the July where my futures were hedged and May futures in which the basis was set against will show up as a loss in my hedge account. Was it more profitable to sell my grain this spring compared to last summer?Basis Profit: -43 cents vs. -28 cents = +15 centsMarket Carry: 15 cents + 27 cents = +42 centsMarket Carry Loss: = -9 centsTotal Profit = +48 centsBut there are additional costs to hold the grain that long. CapacityI have to have more than 100% bin space capacity at home to do this. Currently I can get a 7-year bin loan that costs 25 cents per bushel per year on the type of bins I have recently built. Handling, shrink and fumigationStoring and handling the corn for more than one year requires that I run the fans on the bin in the late summer and fall to keep the corn in condition. My shrink factor is minor because I can blend overly dry corn from one bin with slightly wetter corn in another. If I couldn’t blend, I would have to add the cost for shrink loss on the dry corn and/or the discounts of loading out wet corn. Insects could be an issue affecting grain quality too, and there could be fumigation costs that need to be considered. InterestThe interest cost to not pay down my operating note from the sale of grain on September 1st last year also needs to be considered.My corn’s cash value last September was: $3.20Current operating interest rates: 6%Cost per bushel per month to not pay down the operating note: 1.6 centsTime spent holding grain in bin (September to Mid – April): 7.5 monthsTotal interest cost to wait: 12 centsConclusion: Storing grain more than 1 year was MORE profitableNet Profit from Trade: +48 centsBin Ownership Costs: -25 centsHandling Costs: -4 centsInterest Cost: -12 centsProfit: 6 centsThis was my second year of having extra bin space to make this type of trade. It was also the second year in a row that I have made money holding some of my grain from one marketing year to another. While the bin cost is reducing my profits this year it allows for me to build equity on the ownership of more than 100% bin capacity on my farm. Once those bins are paid off that cost becomes a huge profit potential for me over the life of that bin.The market usually pays for corn to be stored forward in time, so owning a grain bin is the best return on investment on my farm. And while storing grain longer than 1 year can increase corn quality risk, a little bit of management goes a long way to reduce potential issues. For me the increased profitability and flexibility on-farm storage provides outweighs its disadvantages. Please email [email protected] with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results.last_img

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