TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
STORE OR SELL?
Recent conversations with farmers at winter farm shows had a similar tone; most are not sure what they want to do with old crop corn. Should they store or sell? This week we will look at different strategies depending on your outlook and timetable. Futures continue to languish in a sideways price pattern, offering little opportunity trading near the low end of a 20-cent range.
Let’s first talk basis. If basis is tighter than usual, consider locking this in if you intend to store. If not intending to store, consider selling cash. Basis typically widens when futures rally. That is, cash prices do not move penny for penny with futures. Time is also a concern. As winter wears on and cash flow needs for producers increase, basis can widen, as end users expect more farmers will be selling. Bottom line, if you have a strong basis, consider either basis contracts or selling.
If you sell corn, you have removed yourself from the marketplace. Gone is market and basis risk and opportunity to benefit if prices recover. If you believe corn prices are too low and want re-ownership, consider purchasing either futures or call options. In the end, what you are doing is managing your basis, generating cash flow, and giving yourself an opportunity to stay an owner through paper tools.
A call option provides you (the buyer) with limited risk ownership, while the futures provides unlimited risk. Many like futures because there is no premium paid. Know that risk, unless defined, can be a concern. Managing futures risk can be accomplished with stop orders. Stop orders are risk points underneath the market that are triggered if futures trade at or through these point/prices. If you have ever traded futures and used stops, there is a chance you may have been stopped out. This can be frustrating, should prices then turn and move the direction you want. Yet, we might analogize stop orders to seat belts. When they do work (exiting near your risk point), you will never know how much they have worked for, as you are out of a market that could be continually moving lower. Just like seatbelts, if they save your life in an accident, you don’t know how bad it might have been for you otherwise.
Condition of corn in the bin and road postings are variables you may want to weigh in the weeks and months ahead when deciding when to deliver. Quality issues this year have many concerned as to just how long corn will stay in good condition. In addition, the potential for extra fieldwork this spring due to wet conditions this past fall is also a consideration when weighing how much time you will have available to move corn.
There are usually three reasons why producers store corn at harvest. One is to get crop off the field in a hurry, avoiding standing in long lines waiting to unload at a local elevator. The second is to have control of your inventory, being able to take advantage of price rallies or forward sell into the carry. The third is to manage basis. Typically, basis is at its lowest level during harvest when most farmers are delivering. Currently, basis is strong, and there is not a full carry in the corn prices, in particular the cash market. Therefore, the market is not rewarding you to store, consider selling cash sooner than later.
As with any strategy, consider the risks and rewards before entering into any position. Visit with a professional and trusted market advisor to help you with these important decisions.
If you have questions, comments or would like an idea for your farm, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Author
Lisa Heder