Grain marketing strategies to consider for 2023
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EmailIdentifying tools that match your market expectations.
Predicting what grain markets will do is similar to weather forecasting. There are a number of factors that indicate what will likely happen, but much remains unknown until it actually happens. The most we can do is mitigate our potential risks and position ourselves to take advantage of any opportunities that arise. With grain marketing, there are several ways to mitigate risks and secure opportunities of better prices. Mitigating risk begins with your market strategies.
Marketing strategies are based on two primary considerations, a good selling price and perception of future market conditions. A good price entails knowing your cost of production and minimum prices needed to break-even. But market perceptions are largely driven on pricing signals. Two key signals to consider are carrying charges and basis.
Carrying charges
Carrying charges are the difference between two futures contract months, such as December and March. Carrying charges are commonly referred to as market determined storage costs. If a large difference between prices exists, signals indicate that market is willing to wait for grain. Waiting to sell may be a worthwhile strategy if you have access to affordable storage. If differences are small or zero, a market doesn’t want to wait and wants grain now.
Basis
Basis is the difference between futures and cash prices, based on a specific delivery month. It’s influenced by a number of factors. Some of these include transportation costs, local supply and demand, interest or storage costs, handling costs, and profit margins. These factors mean that basis can be different from one elevator to another. Often depicted as a negative value, basis is another pricing signal to watch. Basis is often shown in an equation:
Basis = Cash Price – Futures Price
If basis is extremely negative, meaning a wider gap between futures and cash, it is considered weak. If basis is less negative, meaning a narrow gap between futures and cash, it is considered strong. As our equation indicates, a strong basis can even be positive when cash prices are higher than futures.
Rearranging our equation highlights how important basis can be to what you receive for a cash price:
Cash Price = Futures + Basis
To illustrate how reading carrying charges and basis can impact marketing strategies, let’s look at an example of 2023 corn prices from a local grain elevator:
|
Month |
Futures |
Basis |
Cash |
|
Dec |
$6.65 |
-0.30 |
$6.35 |
|
March |
$6.65 |
-0.13 |
$6.52 |
In this example, futures price of $6.65 is identical for both December and March deliveries. Identical prices means that there are no carrying charges or market determined storage costs. Basis is weaker for December at -$0.30 and stronger for March at -$0.13. These pricing signals indicate that the futures market (carrying charges) wants grain now, while your local grain elevator (basis) wants grain later.
These mixed signals from futures and cash markets actual provide helpful information towards designing your marketing strategy. The first step is identifying which tool matches your market expectations.
Hedge-to-Arrive (HTA) contracts
If futures prices look favorable to you, while basis does not, consider a hedge-to-arrive or HTA contract. A hedge-to-arrive contract will lock in a futures price for a specified delivery month while leaving basis open to hopefully get stronger.
Consider an HTA contract if: 1) you expect futures prices will decrease later. 2) local basis is weak and expected to get stronger closer to delivery. 3) You’re willing to risk futures prices increasing.
Basis contracts
If you think futures may increase and are concerned basis may get weaker, a basis contract may be a better option. Basis contracts essentially lock in the difference between futures and local markets.
Basis contracts offer an advantage if: 1) you feel that futures prices will rise later. 2) local basis is lower (stronger) and expected to get weaker closer to delivery. 3) You’re willing to risk futures prices declining.
For more information on historical local basis, consider using Purdue University’s Crop Basis Tool to help identify basis in your area.
Minimum price contracts
If you’re not sure what futures or basis will do, but you like current cash prices, a minimum price contract could be your best option. A minimum price contract sets a price floor that guarantees a current cash price is your minimum price received at delivery. It allows for positive movement of either futures prices or basis but does require a fee to use.
Minimum price contracts offer an advantage if: 1) market conditions are volatile and largely unpredictable. 2) You feel positive market gains may exist and are worth contract fees. 3) Current cash prices are above projected break-evens.
Storing grain
All three marketing tools outlined involve storing grain. Storing grain can also be a marketing tool by itself. How long you store grain depends on costs compared to carrying charges. If your storage costs are less than market carrying charges, there is an advantage to storing grain until a contract’s delivery month. This advantage combined with another marketing tool creates an effective marketing strategy for obtaining better prices.
For more information on grain marketing, review MSU Bulletin E-3416: Introduction to Grain Marketing.
