With combines rolling throughout the Midwest, some 20 million bushels of 2021 crop corn and soybeans are rapidly filling grain bins. However whether or not holding crops will truly add to their worth stays extremely unsure as an uncommon rising season involves an finish.
For starters, regardless of an export pipeline snarled by storms and the lingering results of the pandemic, costs are at the most effective harvest degree in a decade. And prospects for rallies face questions on whether or not China will proceed to aggressively purchase U.S. grain as its leaders reassert the grip of the Communist Get together over the nation’s companies and folks.
To make sure, some growers might have little selection besides storage if their native foundation is a prepare wreck on account of large crops or delivery snafus. However selections aren’t clear-cut for many producers this 12 months — once more.
Certainly, as I wrote final month (Grain storage lessons learned, Examine grain storage decisions now), merely utilizing on-farm or business storage isn’t in any respect a cut-and-dried determination. Like final 12 months, foundation and spreads are complicating storage arithmetic, doubtlessly limiting prospects for foundation appreciation. And people hoping to exchange harvest deliveries with choices face costlier premiums as a result of of excessive implied volatilities and futures costs.
Farm Futures’ long-term examine of storage methods appears at efficiency based mostly on costs from the primary week of October to expiration of July choices close to the top of June. Right here’s the place markets stand at the beginning of their post-harvest journey, and why that’s necessary.
Corn’s flip within the scorching seat
Corn futures exploded after the 2020 crop was safely tucked away, however the market despatched combined indicators again at harvest. Document early export gross sales firmed foundation to stronger than common ranges at key Midwest places included in our examine. Carry, on this case the distinction between December 2020 and July 2021 futures was just a little smaller than regular, round 18 cents.
Bookings of 2021 crop corn are off to an much more promising begin this fall. Regardless of prospects for good manufacturing and growing carryout, foundation is stronger, the tightest because the 2012 drought 12 months, and July 2022 futures settled final week at solely an 11.5-cent premium to close by December 2021.
Tight carry and foundation dim the attract of one usually worthwhile technique for on-farm bins: the storage hedge, which includes promoting July futures or hedge-to-arrive contracts to guard corn stock. Whereas this limits positive aspects to foundation appreciation, the technique is probably the most constant methodology for corn, beating the harvest money value after prices greater than 70% of the time since 1985, when ag choices started buying and selling once more after a decades-long ban.
The marketplace for places and calls can also be very completely different than a 12 months in the past. Implied volatility, a measure reflecting uncertainty available in the market based mostly on choices premiums, was just a little larger in 2020 than the earlier three years, however under ranges seen in instances of larger value strikes. With July futures barely above $4, the mix of decrease volatility and futures made choices a relative cut price. An at-the-money July 2021 name bought for simply 26 cents and a put on the identical strike was 25 cents. This 12 months the July 2022 at-the-money $5.40 put closed at 43 cents, with the decision at 41.375 cents.
The enormous futures rally into 2021 helped calls repay handsomely, whereas the decrease cost for places to guard stock have been much less of a drag on returns after they expired nugatory. This 12 months the bar is larger. An enormous rally might nonetheless occur if manufacturing seems decrease than anticipated or demand surprises. In any other case calls might underperform.
Soybean outlook cloudy
International consumers had already booked greater than 1.3 billion bushels of 2020 crop soybeans as October started a 12 months in the past. Shippers scrambling for provides turned to futures to guard margins, sending November 2020 to a premium over July 2021. Stronger than common close by foundation and lack of carry stacked the deck in opposition to storage hedges for soybeans, which usually work solely in years with large spreads and a weak money market.
Bookings of 2021 crop soybeans this fall are good, however nowhere close to final 12 months’s degree as questions emerge about China intentions to sluggish imports. This has elevated carry from November 2021 to July 2022 to twenty.25 cents. However with close by foundation first rate, potential appreciation doesn’t seem like sufficient to justify long-term storage hedges.
The large shock with 2020 crop soybeans was the efficiency of proudly owning the crop on the board. Promoting money at harvest and shopping for July 2021 futures – which has similarities to a foundation contract – was the top-earning technique of these studied in our evaluation. Foundation appreciation wasn’t sufficient to spice up returns from on-farm storage as a result of post-harvest positive aspects got here principally from futures.
Promoting beans out of the sector and shopping for the board might nonetheless be another this 12 months – the 2 methods are pretty even of their long-term efficiency. However like corn, utilizing soybean choices this 12 months will price extra on account of larger futures and implied volatilities.
An at-the-money July 2022 name closed final week at 81.125 cents, in comparison with 54.75 cents a 12 months in the past, whereas an identical put prices 23 cents extra.
Regardless of the uphill path dealing with each corn and soybean choices, they do supply one large benefit. Money costs are worthwhile sufficient for many growers to finance the acquisition of this value insurance coverage to restrict losses. Holding crops unpriced, both within the bin or with futures, has downside dangers in comparison with harvest values that might be painful if markets roll over on bearish information.
Knorr writes from Chicago, Ailing. Electronic mail him at [email protected].
The opinions of the writer aren’t essentially these of Farm Futures or Farm Progress.