Revising your grain marketing strategies during a drought
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EmailHave you reviewed your market strategies and are they keeping up with changes in the market environment?
Ongoing drought conditions have raised concerns about 2023 production yields. Commodity markets have reacted with price rallies for corn and soybeans from seasonal lows. While not at winter peak levels, corn alone regained much of its lost value. Only to see prices decline a week later with news of rain. Grain economists are encouraging caution as such volatility may continue.
With the uncertainty of how long drought conditions will last, long-term impacts on grain production remain in question. Economists have also highlighted that U.S. export demand is struggling. These struggles could eventually counter future price rallies as we approach fall. With price stability still a question for harvest, it’s important to rely on marketing fundamentals this growing season.
Marketing grain requires understanding the market environment itself. The market environment focuses on supply and demand which impact futures prices, cash prices, and basis. As this year’s drought has proven, impacts to our market environment can quickly lead to changes in commodity prices.
Have you reviewed your market strategies and are they keeping up with those changes? The following marketing checklist can help you ensure strategies provide opportunities for good prices.
Old Crop Strategies
There are two rules of thumb when it comes to marketing grain. The first rule is to understand what a “good price” is for your farm. This entails knowing your cost of production and minimum prices needed to break even. For help in identifying your cost of production, review MSU Bulletin E-3411: Introduction to Cost of Production and Its Uses.
A second rule of thumb is to have all stored grain sold by July 1. The main reason is based on supply and demand. Demand for grain during planting season is typically at its highest as limited supply remains available. Once July is reached, the market environment begins to look towards harvest for its supply needs. With current price rallies and production concerns, now may be a good time to consider marketing remaining grain in storage.
However, before you decide what to do with stored grain, you need to read the pricing signals.
Carrying charges are one of your first pricing signals. A carrying charge is the difference between two futures contract months, such as May and July. If a large, positive difference exists between prices, signals indicate that your market is willing to wait for grain. Waiting to sell may be worthwhile if you have access to affordable storage. If the difference is small, zero or negative, the market doesn’t want to wait and wants your grain now!
Basis is the difference between futures and cash prices, based on a specific delivery month. Basis is derived from costs your local grain elevator will pay to ship, store, and manage purchased grain. Grain elevators also account for local supply and demand factors. This means that the 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 to be weak. If the basis is less negative, meaning a narrow gap between futures and cash, it is considered strong. As the equation indicates, a strong basis can even be positive when cash prices are higher than futures.
Let’s look at an example of 2023 corn prices during summer months at a local grain elevator:
|
Month |
Futures |
Basis |
Cash |
|
July |
$6.4375 |
0.00 |
$6.4375 |
|
August |
$6.3300 |
-0.20 |
$6.1300 |
In this example, a futures price of $6.4375 is based on a July contract. Basis is strong at $0.00, yielding a cash value equal to futures at $6.4375. In comparison, an August contract has a future price of $6.3300. The cash value is $6.1300 or a basis difference of -$0.20. The basis for August is weaker than the basis for July. The basis signals indicate that local grain elevators want your grain now.
But what about carrying charges? Between July and August contracts, there are negative carrying charges of -$0.1075. The carrying charges indicate that the futures market also wants your grain now.
An important part of selling old crop grain is to know what’s going on in your market environment. If you have grain in storage and pricing signals indicate strong demand, what incentives exist to continue storage into fall harvest?
New Crop Strategies
In a drought, uncertainty about harvestable production and what is “safe to sell” becomes a major concern. The last thing any producer wants to do is take out a grain contract and not have enough bushels to fill it. However, producers who carry revenue crop insurance have support to ensure contracts are met and prices received. To learn more about grain marketing support in crop insurance, read the Michigan State University Extension article: Revenue insurance can help support use of grain marketing tools.
Addressing production concerns is just one part of marketing your grain. The other part is understanding how market environments shift when focusing on new crop expectations. Pricing signals are still your key to making decisions. In fact, the same pricing signals used for old crop apply to new crop strategies.
Let’s look at another example of 2023 corn prices, but during fall harvest months:
|
Month |
Futures |
Basis |
Cash |
|
October |
$6.2000 |
-0.30 |
$5.900 |
|
December |
$6.2000 |
-0.20 |
$6.000 |
In this example, a comparison between October and December futures prices reveals identical prices. Identical prices means that there are no carrying charges or market-determined storage costs. However, the basis for December is -$0.20, which is stronger than October’s -$0.30 basis. 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 provide helpful information about your marketing strategy. The next step is identifying which type of contract, or pricing decision tool, matches your market expectations. Pricing decision tools help to strategically lock in prices for your expected production. Decision tools help you lock in either basis, futures prices, or a cash price itself.
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 the basis open to hopefully get stronger.
If you think futures may increase and are concerned the basis may get weaker, a basis contract may be a better option. Basis contracts essentially “lock in” the difference between futures and local markets. You only have to decide what futures price to select based on your delivery month. To help identify basis in your area consider using Purdue University’s Crop Basis Tool: https://ag.purdue.edu/cropbudget/multi.php.
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.
There are more pricing decision tools that can be used. To learn more, review MSU Bulletin E-3416: Introduction to Grain Marketing. MSU Extension also offers an Introduction to Grain Marketing: Video Series based on Bulletin E-3416.
