What harvest to keep? – Ohio Ag Net


Almost like clockwork the week before, the priceless farmers sold most of their remaining grain stored in elevators that were still in DP. According to some estimates, the amount of corn sold could have represented almost 10% of the 2016 production. Unfortunately, this drop in prices at the end of August has become a common trend in recent years. After several days of farmer sales at disappointing levels, there was a small rebound last Thursday and has been rising since then.

With many PD programs behind us, it is still not certain that the market will continue to rise. There are still farmers who store priceless grain at home that may need to be sold before harvest. Some elevators allow farmers to deliver the old crop against sales of the new crop. This could help prevent a further fall in prices.

There is simply too much grain in the United States and around the world. This plentiful supply will continue to weigh on prices until at least March 31, when the estimated 18 planting intentions will be released. Then the cycle continues with the weather controlling the market. It seems strange to talk about next year’s weather impact, when the weather impact of 2017 largely ends this week.

Which harvest should I keep this year?

I get this question every year, and my answer is always the same. First, you store seeds or specialty crops (this basically includes everything except wheat, corn, or regular beans). The second should be wheat (hard red and soft red in particular). The third is corn. If there is room, save the beans.

Why? When making storage decisions, the most important factor for farmers to consider is interest and cash flow requirements. If you have a farm loan, you can either pay off the crop loan with the grain sold or store it while waiting for higher prices (and pay interest). It comes down to basic calculations (assuming loan interest of 5%, bean prices of $ 9, and corn prices of $ 3.50).

  • Beans cost 3.75 cents per month to preserve (9 x 5% / 12 months)
  • Corn costs 1.45 cents per month to keep ($ 3.50 x 5% / 12 months)

What is the market telling me to do?

Another factor in storage decisions is the gap between near and future months (market carry). I’m looking at the storage time from November 1, because both crops would stay in the bin for the same amount of time. Beans have a slight advantage as they are covered by the November futures contract over corn based on the December futures contracts.

Carry beans

• From November to March, the price is currently 19 cents (four months, November to March – 4.75 cents per month)

• From November to July, the price is currently 34 cents (eight months, November to July – 4.25 cents per month)

Corn port

• From December to March, the current price is 13 cents (four months, November to March: 3.25 cents per month)

• The price from December to July is currently 27 cents (eight months, November to July: 3.375 cents per month)

Based on these numbers alone, the market encourages farmers to store beans rather than corn. But the next farmers must balance the interest costs and the carry premium of the market.

  • Beans (kept in the bin for 8 months) – 0.50 cent per month (port 4.25 – interest 3.75)
  • Corn (kept in the bin for 8 months) – 1.45 cents per month (3.375 carry – 1.45 interest)

Taking this into account, corn is almost 3 times more profitable to store than beans, but the market potential of beans is greater than that of corn. The bean market could easily go up or down by $ 1 to $ 2 a bushel compared to corn, which is more likely to go only about 50 cents to maybe $ 1 a bushel. However, this is a matter of the future, not a storage consideration. It’s about the same cost per bushel to buy back beans or corn in a futures position. So even if a farmer thinks there is huge upside potential in beans, it is better to sell beans for cash and reclaim the grain in the form of futures. It would have almost the same risk as leaving the grain in the priceless bin while waiting for a rally.

And the base? Base can be a factor, but usually a very minor one when deciding what to store in the home, so I usually don’t include it. The basic movement last year was almost the same for corn and beans across much of the Midwest.

Basis is more of a factor in commercial storage decisions. Commercial storage rates are generally 5 cents per month. Rarely does the base increase so quickly over time. This is one of the many downsides for farmers to use commercial storage, and that’s why I generally advise against it.

If I couldn’t store my beans, I would sell them at harvest. Even though I think the prices will go up, I can generate a lot more cash flow by selling beans up front and taking them back with futures for the same risk.

Why keep wheat before corn or beans?

Farmers who harvest all three crops should also consider wheat spreads when making storage decisions.

  • Outfit from December to July (eight month carry, using the same period from November to July – 6.25 cents per month, 50 cents total)
  • Interest on wheat is 1.9 cents per month (assuming cash wheat is $ 4.50)
  • Profit from wheat storage is 4.25 cents per month

Mathematically, wheat is the clear winner in terms of storage profit per month.

  • Wheat – 4.25 cents per month
  • Corn – 1.45 cents per month
  • Beans – .5 cents per month

What if the market does not recover?

This is the risk of keeping unrated grain in the silo. There is no guarantee that the price of raw materials will go up.

This is why I strongly advocate selling the crop at profitable levels and then working the spreads to capture the premium (detailed above). Remember: Farmers can only enter carry if the underlying commodity is already sold.

Did you sell your entire 2017 harvest?

Unfortunately no, I am late. I prefer to be 90% sold at that point, and my price is only around 50% (pending the next futures values ​​until November). Like many farmers, I thought there was upside potential in June. Clearly, in hindsight, I would do things differently, but I made the best decisions possible with the information I had at the time.

Now more than ever, I have to take as many pennies out of the market as possible. I will do this by working options and futures positions to get a market premium, while managing and minimizing my exposure to risk.

I also need to do a storage analysis to determine how much of each culture I need to keep and for how long. Like my examples above, I’ll look at the market carry opportunities and interest payment factors to help me make the best decision for my farm.

Jon grew up growing corn and soybeans on a farm near Beatrice in the northeast. After graduating from the University of Nebraska at Lincoln, he became a grain merchant and traded corn, soybeans, and other grains for 18 years, building relationships with end users. After successfully marketing his father’s cereals and obtaining his MBA, he began 10 years ago to help his farmer clients market their cereals based on his principles of farmer education, reducing risk, understanding the storage potential and using a basic strategy to maximize the profits of each farm. A strong supporter of educating farmers about futures trading, Jon writes a weekly commentary to farmers interested in learning more and expanding their farming operations.

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