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The majority of annually produced crops such as corn obviously have to be stored. According to a University of Illinois agricultural economist, for corn producers, the question at harvest time will be who will store the portion of the crop which has not yet been sold.
“The portion of the crop that has not been sold can be sold at harvest for someone else to store, or the producer can store the crop on the farm or in commercial facilities,” said Darrel Good. “For the portion of the crop stored by the producer, the second question is whether the stored crop should be priced for later delivery or held unpriced. That decision is influenced by the magnitude of the carry in the corn market, the cost of storage, and expectations about the change in corn prices after harvest.”
Good explained that for corn that is stored and priced for later delivery, the price for later delivery needs to exceed the cost of storage. For forward cash sales, the differences between the forward bids for alternative delivery dates and the spot bid can be compared to the cost of storage to determine the returns to storage. The cost of storage includes interest on the value of the stored crop and the magnitude of out-of-pocket costs to store the crop.
Those costs will likely be higher for off-farm storage than for on-farm storage because overhead costs of existing on-farm facilities would not be an out-of-pocket cost. Spot and forward bids in the cash market reflect current futures prices, the spot basis, the magnitude of the carry in the futures market, and the basis for later delivery. Actual basis in the later delivery periods may differ from the basis reflected in the current forward bid.
“A producer who thinks the basis will be stronger than currently offered could also calculate the likely return to storage from hedging and then selling the crop at a stronger basis level,” Good said.
According to Good, basis levels and basis patterns vary considerably by location so that an example of the likely returns to storage that is representative of all locations is not possible.
“Harvest basis differences are especially large this year as cash bids reflect a tremendous variation in storage capacity, expected crop size, and transportation issues,” Good said. “In central Illinois, average harvest bids on July 25 were 31 cents under December futures. With a July to December spread of nearly 27 cents, the average harvest bid was 58 cents under July 2015 futures. If that basis is near minus 10 cents in mid-June 2015 as it was this year, then the market is offering about 48 cents return for corn that is hedged and stored from harvest to mid-June. With interest costs of about 11 cents ($3.40 at 5 percent for 7.5 months), the return to storage would be positive with storage costs less than 37 cents. With out-of-pocket on-farm storage costs likely to be considerably less than 37 cents for most producers, there is strong incentive to fully utilize that storage capacity. For corn already hedged in December futures, the market is encouraging the rolling of those hedges to deferred contracts if on-farm storage is available,” Good said.
Good added that the corn market is currently encouraging storage of the 2014 corn crop and that decision could be made now with forward sales or by hedging in the futures market. With expectations of a very large crop, however, the opportunity to capture a return to storage is not expected to disappear as the market will likely continue to offer positive returns to storage into harvest time. The question then is whether additional quantities of the crop should be sold at current price levels.
“Corn prices between now and harvest will be determined mostly by the expected size of the crop,” Good said. “Based on market commentary and price behavior, the market appears to be expecting an average corn yield above 170 bushels, with a lot of forecasts pushing into the mid-170s. Those expectations appear justified based on crop condition ratings, but the growing season still has a ways to go. Unusually cool temperatures in July have favored crop development during the pollination period and are characteristic of previous years with very high corn yields. On the other hand, average July precipitation will likely end up well below average, which is uncharacteristic of previous very high yielding years (farmdocdaily July 9, 2014). If dry conditions persist in August, the U.S. average yield will likely still be very high, but perhaps fall short of some of the current lofty projections. If so, prices would increase modestly going into harvest.
“After harvest, corn prices will be influenced by the strength of demand and the pace of consumption,” Good said. “Corn consumption should be supported by a combination of strong domestic demand and the lowest prices in more than four years. If that is the case, corn prices would be expected to move modestly higher after harvest in a typical large-crop pattern. While there is still risk of lower prices, a little patience in pricing additional quantities of the 2014 corn crop appears warranted.”
Source: University of Illinois
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