The cash price of corn from harvest into the following summer normally increases roughly enough to offset the cost of storage. Storage pays frequently enough to make it attractive for those who have bins already paid for, considering that the corn will probably be put in the bins at harvest anyway to avoid the glut at local elevators. Judging the best time to sell stored corn is a guessing game that can have disastrous results. If it is held past the top of the market the following year, not only are you likely to get a low price, but excess interest and storage costs quickly take dollars off the net return.
This prompts the question “Is there any strategy that consistently pays a fair return for storing corn?” The answer is “Yes”. “Selling the Carry” is used by elevators almost every year to buy and store huge quantities of grain and be assured a positive return. Farmers can use it as well.
The carrying charge is the price difference between a nearby contract month and a deferred month. In the corn market this is normally between the current December contract and the following July contract. For instance, if December 2005 corn futures are $2.10 and July 2006 futures are $2.35, the carry is 25 cents. The ”carry” is a bid by the market to pay you for storing corn until July. It is not a prediction of what the price will be in July. To get the 25 cents “carry” you must sell it.
At harvest time, look at the difference between December and July futures. In 2004 December futures were $2.06 on October 15. The same day, July futures were $2.30. To get the 24 cent spread, you must price the corn that day for delivery against the July contract. This is where it gets complicated. You may use either cash or futures contracts. If you want the futures carry, you can either sell futures directly or sell a hedge-to-arrive (HTA) contract that leaves the basis unpriced.
You can also use a cash forward contract for July delivery. Under the price structure for 2004, the current cash price in October was probably around $1.66. If the basis stayed the same until July, the July cash forward bid would be $1.90. This would give you the same 24 cent carry. However, there is a high probability that the basis would be better for July delivery. If the basis were -.30 cents instead of -.40 cents, your forward contract bid would have been $2.00. You could have received 34 cents to store the corn instead of 24 cents.
Under most circumstances in Nebraska, the basis will be better in July than it was at harvest. Therefore, the cash carry will be better than the futures carry. You may take the basis risk yourself and possibly improve on the net returns by selling futures or HTA instead of cash forward contracts. The basis improvement may be more than the elevator estimated when the contract was offered.
You do not always have to hold the cash grain until July. If you sold futures, you can deliver the corn and terminate the strategy any time the basis meets your expectations. If you sell a cash forward contract or HTA, you will probably not be allowed to deliver until the date on the contract.
The only reason that you would sell the carry is to make a profit from storing grain. If your bins are paid for and you use them every fall, this is a way to profit from storage almost every year.
A big advantage is that you can lock in your futures price several months in advance and the cash price if the basis is favorable at the time. If the basis is not favorable, you can take the risk yourself and probably add cents per bushel to the results.
Another advantage is that it is multiple step process that you can stop at any time with very little probability of losing money.
The biggest disadvantage of selling the carry is that it is management intensive. You must evaluate the potential profit and decide if you want to do it. If you do, you must price the grain to get the carry. Procrastination is your enemy because the market is paying you to store. You want to be paid for as many days as possible. You must watch the basis and the futures market to capture the maximum gain.
The biggest risk in selling the carry is that you get what you agree to when you make the sale. If the futures price subsequently rises, you get only the price at which you sold. On the other hand, how many times have you been in a business deal and the worst you could do is get what you agree to?
One of the nicest features of selling the carry is that it works very well with other strategies. In years when prices follow the normal seasonal pattern, you sell December futures in the spring before planting. The average date for the yearly high is the first week of April. At harvest you can evaluate the carry. If it is adequate, buy back the December futures, sell July futures and store the corn.
If the LDP is large at harvest you can take it then. Otherwise put the corn under loan. If the corn is under loan and the price goes down the following summer, you may be able to pay the loan back at less than loan rate and having the interest forgiven. Sometimes it is possible to add several cents using the marketing loan gain.
The size of the carry may be an indicator of the price the following year, but not in the manner farmers normally think! When the carry is large, it indicates a large crop or poor demand or both. This usually means limited potential for a significant rally. When the carry is small, it usually is an indicator of a small crop or good demand. In this situation, there is a high probability of better prices ahead. Under these circumstances, it is better to store the grain unpriced and not sell the carry. Historically, when the carry was 15 cents or less, it was better to store the corn unpriced. If it was more than 15 cents, selling the carry was profitable.
Selling the carry is a very low risk strategy for generating profit from storing corn. It is a multiple step process that requires management decisions along the way. It works very well with forward pricing and the government price support program. To get the carry, you must sell either futures contracts or cash forward contracts when the carry is available.
Selling the carry also works for storing soybeans. The returns are not as consistent as they are for corn. Also, the opportunities to sell on the frost rally and dead cat bounce make the carry less attractive in the soybean market. I have never sold the soybean carry in my own business. I have used it with several times for corn.
Following is an example of how the carry might work for 2005 corn. Actual prices for 2004 and 2005 are used where available:
March 2, 2005: Sell December corn futures for $2.42 (actual price)
October 14, 2005: Another big crop has the corn price depressed. December futures are $2.06. Basis is -$.40, making the cash price $1.66. With county loan at $1.87, the LDP is $.21. July corn futures are $2.30. (Actual prices from 2004). Choices:
June 15, 2006: Another big crop is in the ground and growing. July futures drop to $2.00. Basis improves to -$.25. Cash price is $1.75. At that point, buy back July futures for $2.00, netting hedge profit of $.30. Sell cash for $1.75. Gross income per bushel is $1.75 + $.30 July hedge+ $.36 December hedge+ $.21 LDP= $2.62
Returns from alternative strategies:
1. Sell off combine and take LDP= $1.87
2. Hedge, sell at harvest and take LDP= $2.23
3. Store unpriced until June 15, take marketing loan gain= $1.87 less storage costs
4. Hedge, take LDP and sell the carry=$2.62 less storage and interest. Eight months interest approximately $.075
5. No early hedge. Take LDP at harvest and sell the carry from October to July= $2.21 less storage and interest
CAUTION: Odds are about 70% that it will work this way. If the price goes up, you are stuck with $2.42 less basis plus the potential return from selling the spread between December futures and July futures.