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hands holding soybeans

Will Storing Soybeans Pay?

Merchandising unpriced corn and soybeans will likely prove challenging this winter, given USDA’s forecast for ending stocks in August 2018 of 2.44 billion bushels of corn – the highest level in 30 years – and 445 million bushels of soybeans – the highest level in more than a decade.

Other than short covering (commodity funds buying back their short futures positions), expect very few supply or demand surprises that could bring speculative commodity funds back into the futures markets.

Perhaps soybean futures prices could rally this winter with weather uncertainty in South America. A mild La Niña growing season could lead to drier conditions in Argentina and southern Brazil.

Merchandising like your elevator

Many elevators and co-ops have large bunkers of corn stored temporarily outside with covers. How will they make money on those bushels? The answer: Grain merchandisers lock in futures price carry, understand their local basis, and know they have a relatively low cost of grain ownership.

When an elevators or co-op buys corn they plan to store, they sell the underlying futures contracts that represent those bushels. When the bushels are processed or delivered, they buy back those contracted bushels in the same futures contract month. They will often roll their futures contracts forward to maximize futures carry as currently exists in the futures markets.

Futures price carry is defined as the difference between nearby futures and the more distant or deferred months – in this case, May and July as March is the nearby futures contract.

At the end of October 2017, November futures closed at $9.75; March futures, $9.95; May, $10.04 and July, $10.12. So the futures market was offering 37¢/bu. to store beans until July.

To capture this carry, a farmer would have to sell futures in the deferred months (May or July) via a hedge or initiate a hedge-to-arrive (HTA) contract using those same months and make a spring delivery of bushels. It is worth noting that as 2017 came to an end, July beans closed at $9.78 – only 3 cents above the nearby contract price during harvest.

Merchandising like your elevator

In developing a marketing plan for inventory in storage, consider not only the futures price carry but also local basis and your cost of grain ownership.

Basis is simply the local cash price minus the nearby futures contract. It reflects the local supply and demand for soybeans and can vary by processor, river terminal, elevator or co-op facility.

The graph below shows examples of the soybean basis trends at a central Iowa elevator versus the March futures contracts each year since the 2012 crop. The line begins with harvest in October and ends approximately March 1, when the contract goes into delivery.

soybeans basis trendsNote the pattern. The widest basis each year occurred during harvest. The basis trend was much narrower (a smaller negative number) for both the 2012 and 2013 crops when weather concerns had cut ending stocks. In each of the last four years, as U.S. ending stocks have increased, basis has been much wider (a larger negative number).

Since 2014, most of the winter basis appreciation is realized by early January and little or no improvement is seen thereafter. That means that any profit from storage is more likely to come from futures than from basis improvement once the harvest pressure is over.

Cost of ownership

Knowing your cost of ownership for stored bushels is critical. For simplicity, let’s use $9.02/bu. cash soybeans as the harvest time starting point. We’ll assume interest accrues on stored beans at an annual percentage rate (APR) of 5 percent.

soybeans cost of ownershipNote the on-farm storage line (checked) is estimated at 1 cent per bushel per month while commercial storage line (dots) is 16 cents for the first 90 days and 2.8¢/bu. for each month thereafter. Of course, storage charges vary depending on facilities — on-farm vs. local elevators vs. co-ops.

In this example, by March, the cost of stored beans rises to $9.50/bu. and by July, almost $9.75.

The dark solid line is the cash price bid at this elevator weekly since harvest. Some years, bushels stored commercially do not provide a positive return above the cost of ownership. On-farm soybeans have a better chance of a positive return, in addition to the ability to shop around for better processor cash bids.

Conclusion

Many farmers are storing record amounts of unpriced grain and face wider-than-normal basis. Expect movement of these bushels to impact cash prices. The availability of South American new-crop soybeans could add pressure to both futures prices and basis well into the spring and summer months.

Cash prices will need to increase enough to provide a profit margin above the cost of your grain ownership. Expect financial pressure this winter on some farmers, especially for those storing a large number of unpriced 2016 as well as 2017 bushels and having cash flow needs.

Calculate your own cost of ownership for stored bushels. Consider creating line graphs like the example provided to assist your marketing plan and as a reminder that storage and interest are not free. Also, track your local basis weekly where you typically deliver bushels to better determine basis trends.

Consider using a variety of marketing tools, including basis or minimum price contracts, so you can eliminate storage costs and lock in the basis, if attractive. You can still participate in a futures price rally when using the deferred contract months (May or July). However, if you make cash sales in the winter months, you will not be able to capture the futures price improvement if it occurs in the deferred futures contracts.

What’s Your Storage Strategy?

With the bounty of the 2017 harvest comes the need to review your marketing plans for inventory. There are three factors to consider in marketing old-crop production:  futures price carry, local basis and the cost of grain ownership. Separating futures from basis presents an opportunity to improve your price received.

Futures carry

Futures carry is the difference between the price of nearby futures and contracts further into the future: March, May and July. In times of large carryover, it is typical for the market to offer carry, to incentivize elevators and farmers to hold the crop off the market. This year was no exception. By late fall, futures carry was 30¢ from December to July for corn – nearly full carry, and likely to cover the cost of on-farm stored bushels but not bushels stored commercially by farmers.

To capture that carry, farmers would have to hedge their bushels by selling futures in the deferred months or initiate a hedge-to-arrive contract. In either case, basis could be separately, when it improves.

corn basis trendsBasis

Basis is simply the local cash price minus the nearby futures contract. It reflects local supply/demand and can vary by elevator, co-op, processor or river terminal. Basis typically is weakest (and cash price lowest) at harvest, when supplies are ample. As the chart illustrates, this has been the case – in the face of increasing ending stocks – since 2014, with a 15¢-20¢/bu. improvement seen from late harvest to early January. Basis appreciation in January and February is limited because large volumes of corn need to be moved out of temporary storage and farmers need to sell to meet winter cash flow needs. Note that fall basis was stronger (less negative) in 2012 and 2013, when harvest was smaller and stocks were tighter.

corn cost-of-ownership trendsCost of storage

Knowing your cost of ownership of stored bushels is critical. The following assumptions are used for 2017 production in the graph below: cash corn at harvest, $2.97/bu. (price on Oct. 26); interest at 5% annual percentage rate (APR); on-farm storage cost is 1¢/bu.; commercial storage is 16¢ for the first 90 days and 2.8¢ a month thereafter. Clearly, these factors will be different based on your circumstances.

The dark, solid line is the cash price bid at one elevator since harvest. As the chart shows, bushels stored on the farm have a better chance of being sold above the cost of ownership than commercially stored bushels. However, a significant increase in the futures price along with basis appreciation will both likely be needed to see cash prices offered above the cost of ownership.

Spell out your plan

Calculate your own cost of ownership for stored bushels. Consider creating a line graph like the one above to help assess profitability of storage. Lock in futures carry when it is available. Historically, futures tend to peak seasonally between Easter and mid-July – a little later for soybeans.

Keep track of your local basis at least weekly and lock in that component when it has improved post-harvest. Consider using a variety of marketing tools, including basis or minimum price contracts so you can eliminate storage costs and lock in the basis if attractive.

However, if you make cash sales in the winter months, you will not be able to capture the futures price carry offered in the deferred contracts (May or July). As noted earlier, a futures hedge or HTA are ways to lock in the futures component.

Visit the Iowa Commodity Challenge site more information regarding storage and marketing.

Winter Wheat Off to a Positive Start

USDA reports wheat planting at 94 percent complete in the 18 states it tracks, just one point behind the five-year average. Top state Kansas is 97 percent finished, two points behind average.

At 84 percent emerged, the 18 states are right on average, while Kansas is 2 points behind. USDA rates 59 percent of the crop good/excellent, up from 52 percent this week last year. Only 9 percent is rated poor/very poor, one point less than last year.

Kansas is 56 percent good/excellent and 10 percent poor/very poor. This is quite a bit better than last year at this early stage, when 46 percent was in the top end and 12 percent in the bottom categories.

Soybeans Hit 97 and Corn 93 Percent Harvested

This week’s Crop Progress report from USDA indicates all that remains to be harvested are acres here and there. Soybeans have reached 97 percent in the 18 states – two points ahead of average. North Carolina is the laggard at only 62 percent – but its average for this time is 44 percent. Kansas bean harvest stands at 94 percent, two points ahead of average

Likewise, the 18-state corn harvest is 93 percent complete, one point ahead of average, and Kansas is 99 percent finished, two points ahead of average.

Corn and soybean basis are quite weak in the state, as the charts below indicate, supporting the reports we are hearing that buyers are full-up and grain piles are not uncommon this fall. The corn futures market is offering 8 cents carry to March and about 16 cents out to May. Soybean carry is 15 cents to January, 23 cents to March, and 30 cents to May.

Devcorn201642 Devbeans201642

Excluding drying since that decision already has been made, Iowa state University’s storage cost calculator (http://www.extension.iastate.edu/agdm/decisionaidscd.html#outlook) estimates the cost of storing corn until March at 22 cents and soybeans at 38 cents. These are greater than the price improvement the futures market is projecting at this time.

Wheat and grain sorghum basis also are worse than usual.

It’s the hope of basis improvement that has many farmers storing both corn and beans this year. Given the seasonal tendency to improve after harvest and the fact that USDA’s monthly supply/demand reports have been raising usage regularly, hopefully demand will run through the piles and allow basis to improve quickly.