How to avoid giving away your storage

first_imgShare Facebook Twitter Google + LinkedIn Pinterest The recent market collapse was largely caused by higher than expected corn and soybean yields and carryouts. In the end, increased production in the western Corn Belt made up for lower yields in the east due to the wet spring. Also, world carryout increased because the USDA is estimating that China hasn’t used as much corn for feed as expected the last three years. None of this is bullish grain near-term or long-term.Supply disruptions are likely the only possibility for $4 corn and $9 beans right now — for instance, a South American weather problem or a major U.S. weather event next summer. Lack of farmer selling should keep prices from a free fall, but some have suggested $3.35 corn and $8 beans as a possibility.What should farmers do now? I continue to stress that farmers need to learn how to use futures, spreads and basis more than ever to get every penny they can out of the market. In many cases, just focusing on the cash price will make profit more difficult to achieve for farmers who are unpriced. Don’t give your storage awayOften in grain marketing farmers need to think about things a little bit differently than the “common” or “conventional” wisdom out there to get bigger premiums and profits out of the market. The following is an example of a common mistake I see among farmers that don’t have 100% on-farm storage.Usually I see farmers make sales for December or January delivery as their first and only sale before harvest and often they do this to get the market carry as a premium. Most farmers do this because conventional wisdom says that farmers will have to sell grain they need to core out of their bins. However, this wisdom is only true for farmers with 100% on-farm storage and the wrong thing to do for those that do not. Let me explain.Last July corn delivered for December was $4.60 while harvest delivery was $4.50. Basically, it means there was a 10-cent premium to hold the grain for two months after harvest, or about five cents per month. Many farmers that don’t have 100% on-farm storage know they still need to core their bins sometime in the winter and that is why they originally sold for December delivery to capture the carry, thinking they were getting the best deal. However, these farmers still have to deliver grain at harvest because of their lack of storage. Today, the market is under $3.70 and many farmers don’t want to sell their grain at these levels. So, they will pay storage fees at their commercial facility, which are likely at five cents per month, waiting until prices go up.Farmers that tried to capture the carry early, will wipe away all the profits from the original trade waiting for better prices on the unpriced grain in commercial storage. Many wind up paying around 30 cents to store grain until the spring. By doing this, the 10-cent premium on the grain they sold first will eventually be wiped away, creating a net loss of 20 cents on their marketing program. Most farmers are too focused on cash prices and not paying attention to expenses of storage.I understand the need to core bins in the winter. Farmers are trying to take advantage of the market carry for December delivery and that makes some sense. However, farmers really could wait until the end of January to core bins. If they were to do this it would give them an extra two months’ worth of free storage in their own bins at home. This would allow for a longer time period for prices to move and possibly basis levels to improve. Thus, a farmer doesn’t give away any storage.It’s difficult for farmers without 100% on-farm storage to estimate how much storage they will need each year. This is why I like to use futures, it gives me the flexibility to decide when, where, and how much grain I want to move at harvest or the middle of winter. Flexibility in your grain marketing strategy will lead to increased profitability.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. He can be contacted at [email protected]last_img

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