"Big Crops, Carry and Basis"

After two bearish reports last month, confirming not only bigger crops in the field by the monthly Supply/Demand Report on the 12th, we also found about 140 million bushels of corn and about 40 million bushels of beans in the Quarterly Grain Stocks Report on the 28th. Both reports were met with selling, but at this writing (a day late due to harvesting) we find prices rallying back on the first day of October. There are many reasons to bounce, but the simplest explanation is a new month and new quarter has found some investment money looking for a good home. Prices of commodities are relatively cheap, and with the stock market rallying to all time highs, perhaps some have decided to cash a little in and find another investment opportunity. We have often commented here that money flow drives price more than anything else, and today looks like a good example of just that. Our crops are big, yield reports are very consistent with records reported in many areas. This is old news now, but on October 11th, USDA will update those crop sizes, and this one should be close to final as most sample areas will be harvested and checked against previous estimates. They will factor in new yield estimates along with grain stocks, and new carryout numbers will be forthcoming. How these numbers compare to expectations along with harvest weather and progress will drive our markets in the coming weeks. Some other questions that should find some more accurate answers are:

1) How will USDA handle export projections? So far corn is well ahead, beans and wheat behind previous estimates

2) Wheat crops in Australia, Russia, and the EU, higher or lower?

3) South America production estimates for 2019?

4) What will USDA project for average farm prices?

Futures price is half the equation of cash price, and as many are finding out, basis this year is the other. We are still quite concerned that basis risk is still present, and may be worse if we do rally on trade agreements, or even talk that they might be ready to start talks. This is where we really need to focus! When do you want or need cash flow? What crop is best to sell and best to store if space is limited? How do I capture the carry in the market? These are the questions we get almost daily, and the answer is very geographically specific. Here are some simple steps we use here to determine our best course:

1) Start with local basis, and your expectations of improvement or widening if we get a post harvest rally

2) Look at the carry (spreads) in the market to determine which crop may pay you more to store

3) Determine when you want or need cash, consider basis contracts for those months that you want to deliver

4) If sales are made, and you feel a rally is possible, consider low risk re-ownership strategies but keep risk limited

5) Owning puts by producers is never a bad idea, especially going into the report on the 11th, they not only protect the downside, but can be used to back up futures longs if cash sales are made and re-ownership is desired

Its all about basis and carry, and what is happening in your area. Utilizing the marketing tools we have can make a big difference in your bottom line. If we can collect 25 cents storing corn until June, and basis improves 25 cents, that's 50 cents on 200 bushel corn, only $100 per acre? With 60 bushel beans, 50 cents carry to July, basis improves by 25 cents, that's $45 per acre more revenue. Granted, these are only hypothetical examples, and your numbers may be different, but do the math and see what you can do, and IF we can get any kind of a rally, what looks bleak right now may look much better if we position ourselves correctly, limiting or laying off risk where possible. When considering storage, and the costs, it may be time to add some as well. We do not own a bin building business, and do not advocate building them to just dump grain in and forget, but we do strongly advocate a risk management program that uses storage to gain revenue. Make sure you are willing to hedge and roll and utilize all potential benefits of those facilities if you decide to build one! 

Our market feelings right now, and this is just our "leanings", are still friendly corn based on demand, neutral but maybe a bit friendly on wheat, and a little negative on beans at this price level. In other words, we would be more inclined to own puts on beans going out to March, and using the re-ownership plans listed above. Make sure you call and go over any idea to make SURE we are not adding to risk, but leveling it off or reducing it.

In conclusion, it is simply basis and carry at this point, cash flow planning and following through with a plan. We will not be wordy today, as we want to get in the field like you do. If it rains, give us a call and we can go over in depth our ideas to maximize our potential profits, and keep it safe and happy out there! The yield monitors are giving us a lot to smile about!

Dates to remember this month:

Export Inspections every Monday at 10 am

Export Sales and Shipments every Thursday at 7:30 am

Crop Conditions every Monday at 3 pm

October 11th: Monthly Supply/Demand and Crop Production

October 19th: Cattle on Feed

October 26th: November  Options Expire

Mike Daube  888-391-6330

Allen Gard     573-221-9234