Selling the carry can be profitable

For the next week, the market seems to be at a standstill until harvest is fully underway in the Midwest. End users won’t pay up for grain with the record yield projections and farmers won’t sell corn at these values until he knows his yields.

When will the corn low be in place?

In the last 40 years, the low was in September three years and October one year. Based upon historical trends, the chance for the low to be in the Nov / Dec time frame is 33%. Last year, corn dropped 10% in value between mid-September and the end of the year ($.40). There may be another 10% drop ($.30) this year.

Selling the carry

Recent low prices are driving farmers to ask, “What should I do with my unsold corn?” I often hear professional marketers and farm economists tell the farmer to “sell the carry” with little additional explanation.  I have asked many farmers if they understand what this means, most tell me they do not. Let’s look at examples from Friday’s market close…

Dec corn was at $3.31 and July was at $3.60. The “carry” is the difference between the Dec and July, in this case it was $.29.

This means the farmer is getting paid $.29 to hold his grain from harvest until July. Many farmers think that if they just hold their grain and sell during that summer month, that they will naturally pick up that premium, but that is rarely the case. Typically the summer price will gradually decrease/equalize to the level of the nearby month. In other words, the premium is gone by the time they get to summer. For instance, in the last 25 years, there were only five years where the market increased over the market carry for that year during those eight months. So 80% of the time in the last 25 years, it was more advantageous for the farmer to “sell the carry.”

Collectively professional marketers know this, and that’s why they recommend this to farmers.

Should farmers sell corn right before/during harvest?

Farmers need to think about their corn as two marketing systems, futures and basis, rather than just focusing on cash price (futures and basis added together).

• Basis (local price) – tends to be at the lowest during harvest.  As grain is harvested, it needs a place to go, so basis is lower.  Basis is higher the rest of the year as supply locally decreases.
• Futures (CBOT) – tend to move lower from Oct 15 to May 15.  Since 1990, corn has only improved (more than the carry) 5 years, or 20%.

With ethanol expanding in 2007 it created more volatility in the market, but the results are largely the same.  Over the last 8 years, incorporating a “carry” and “basis” strategy has resulted in a $.38 average price premium versus waiting to sell the grain later in the year.  This chart clearly illustrates that in the last eight years it was more profitable to have a marketing strategy that considers market carry and basis versus just waiting to sell.

There were two years where it benefited the farmer to wait (2008 and 2011), but the other six it was more profitable to sell ahead of time and work the carry and basis. And, averaged over time, it was a $.38 premium. In addition, if farmers adjust their grain marketing technique to do this, they could also greatly reduce their risk. In other words, they would not leave themselves exposed to market volatility without price protection.

The price I’m showing here shows the averages between April-June (typically the high point price of the year). It should be said that there were small windows each year where if a farmer had waited, and then managed to sell at the very top of the market, the price difference (or premium) wouldn’t have been as large as I’m showing. But, timing the market is extremely hard to do. I don’t know any farmer who is consistently doing that. For instance, this year there were opportunities to sell corn at $5 in April, so by waiting the amount made would have been similar to the premium shown here (maybe a little higher). However, most farmers didn’t sell. Most hoped the market would continue to go up. In fact, many farmers continued to hold as the market fell through the summer below $4 and in that case selling early was much more advantageous.

Admittedly, this strategy is a little complicated for farmers to understand initially. But rather than worrying about selling at the top of the market every year, being right 80% of time makes me feel good about my plan for my farm.

on 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.

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