Soybean basis selling strategy

There was a small rally for the week in corn and beans.  While nice to see, it was probably caused mostly by a drop in the value of the dollar. Speculators bought grain to cover their short positions and pocketed a little profit. A few small bad weather pockets (i.e. frost in Manitoba, heavy Midwest rains, etc.) may have also contributed, but it was minimally.

I don’t expect this rally to go far, considering the surplus grain stored on farms.  Look for $3.80 on the July and $4 on the Dec to be met with eager farmers selling.  Soybeans may get to $9.40-$9.50 on the Nov, but farmers will start selling at those prices.

Is it too wet and cold?

This week a grain elevator colleague wrote the following in his enewsletter to customers:

“Historically speaking, when 70% of the corn crop is planted by May 15, the worst crop has been only 1.4% below trend. Fast-planted crops also tend to feature more acres in the June report.”

He continued with more bearish information:

“For what it’s worth, the short covering spec rally could be a real feature, but it is interesting to point out that their net short of nearly 170k contracts equals about 850 million bushels. The farmer is holding onto about 5 BILLION bushels. So, that equates to about 1 buyer for every 5 sellers.”

Many may remember analysts in 2009 saying it was too wet and cold for corn, then later it turned out to be a record crop.  But on the flip side, in 1993 it was “too wet” and we produced below trend.  Anything is possible, but I tend to stick with the adage “rain makes grain.”

Market Action

Last week I finally pulled the trigger on my 2014 bean basis. The following  example illustrates not only why it’s so important farmers breakdown crop sales by futures, basis and market carry to maximizing profits, but also why 100% on-farm storage is so advantageous.

My bean basis selling strategy

At harvest beans basis was -.70, picked up on my farm. Instead of taking the beans immediately to a processor (or the local elevator), we stored it all on the farm. Usually basis will increase after harvest because farmers are less likely to sell and move grain once it is stored in the bin.  Also, typically farmers do not store beans on-farm (preferring corn if limited on space).  Knowing this tendency, we could take advantage of the potential premium offered in the market later in the marketing year.

Note – The local shuttle loader and soy processor bids have freight taken out, so all bids are apples to apples

I also sold -.10 basis, picked up on the farm. This bid was from a trading company and not my local soy processor or shuttle loader. This premium price was available because I use futures hedging and stored beans on the farm. This has been the highest basis point throughout the whole season.  With 100% on-farm storage (both corn and beans), it allowed me to capitalize on a significant basis increase (60 cents), which would have been unavailable if the beans were stored in a commercial facility at harvest.

What does this mean for my bean prices overall?

Market Carry Premium – Last October, I moved my position from Nov futures to July futures for 32 cents.  This amount alone more than paid for the cost of having brand new bins and all the storage expenses on the farm.

Market Carry is only available once the crop is priced, and usually on-farm storage is needed to capture the most potential from it.  As time progresses, market carry profit decreases until after May it’s no longer available.  For soybeans, the best chance for market carry premiums is November.  As chart above shows, the 32 cents market carry premium for our farm was at the top of this year’s potential.

Futures

Up to now, my beans futures price was set at $11.47 average sold price. Most of those sales were set nearly a year ago using futures and options strategies.

So taking my average futures price, and adding the market carry premium of +32 cents and the basis set at -10 cents, my final price for beans was $11.69 CASH price picked up on the farm.  Had we just sold the beans for harvest delivery using tradition forms of sales it would have meant receiving the basis of -.70. This would have resulted in our CASH price being $10.77 ($11.47 + -.70 basis). Understanding how to use storage, market carry and basis correctly can have big impacts on your bottom line.

Positions:

This was the last trade of our farm’s entire 2014 marketing program.  Following summarizes our 2014 price positions as well as 2015-2016 estimated positions.

I hope that by providing examples and specifics of my farm’s marketing program it not only illustrates the rationale for why a more sophisticated marketing strategy is more advantageous for farmers, but also demystifies the process.  Farmers looking to stretch profits within tight margins need to adjust their marketing strategy by using methods I detail above.  Are you following the “farmer herd” with your marketing strategy, or are you ready to adopt the method that large grain companies have been using for decades? Consider marketing your grain a little differently, it will help your bottom line regardless of where prices are.

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.

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