Price checking your grain market strategies
Have you reviewed your market strategies and are they keeping up with changes in the market environment?
Marketing grain requires understanding futures prices, cash prices, and basis. It also requires understanding the market environment itself. During our summer months, that environment can see changes that impact prices. Have you reviewed your market strategies and are they keeping up with environment changes? The following market strategy 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. It’s also helpful to know how your cost of production compares to other farms within the industry. If your costs are higher than most other farms, you may be paying too much to operate and expecting more than you should from grain prices.
For help in identifying your cost of production, review MSU Bulletin E-3411: Introduction to Cost of Production and Its Uses. An additional resource for industry farm data is the FINBIN database: https://finbin.umn.edu/.
A second rule of thumb is to have all stored grain sold by July 1st. 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 fall harvest for its supply needs. A new crop means an ample supply of bushels and prices usually are lower with that in mind.
That doesn’t mean that all good pricing opportunities are gone during this period. However, before you decide to hold grain into a summer market environment, you need to read the pricing signals.
Carrying charges are one your first pricing signals. A carrying charge is the difference between two futures contract months, such as May and July. If a large difference between prices exists, 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 or zero, 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, storage, manage purchased grain, as well as local supply and demand factors. This means 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 to be weak. If 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.
Rearranging our equation can highlight how important basis can be to the cash price you receive:
Cash Price = Futures + Basis
Let’s look at an example of 2022 corn prices during late months at a local grain elevator:
In this example, futures price of $6.3150 is identical based on a July futures contract. Basis is strong at a positive $0.45, yielding a $6.7650 per bushel cash value. There are also no carrying charges as prices between July and August are identical. The pricing signals in this example are telling you that both the futures market (carrying charges) and local grain elevator (basis) want your grain now.
The important part of selling old crop grain is to know what’s going on in your local market. If you have grain in storage and pricing signals indicate strong demand, what incentives exist to continue storage into fall harvest? This question is especially important if fall prices are lower and storage will be needed at harvest time. Also keep in mind that location and transportation costs may offset different basis and cash prices between elevators.
In addition to tracking prices at your local elevators, a tool to help identify basis in your area is Purdue University’s Crop Basis Tool at https://ag.purdue.edu/cropbudget/multi.php.
New Crop Strategies
The same pricing signals used for old crop strategies apply to new crop. A key difference is using pricing decision tools to strategically lock in prices for your expected production. Historical price and basis patterns for both futures and local grain elevators become critical when using decision tools. Decision tools use this information to help you lock in either basis, futures prices, or a cash price itself.
If basis at your local elevator is stronger than normal, you might consider a basis contract. This type of contract allows you to lock in basis at its current value. You only have to decide at what futures price to select based on your delivery month. The advantage of a basis contract is that it allows you flexibility to net a higher cash price if you think futures will go up.
Alternatively, futures prices may look favorable to you while basis does not. Basis may be weak or expected to get stronger as you get closer to delivery. A hedge-to-arrive contract allows you to set a futures price, while leaving basis open to get stronger. The advantage is that if futures is favorable and basis does get stronger, you’ll net a higher cash price.
There is also a third possibility and decision tool to consider. The cash price being offered at your chosen delivery month may be a good price. This is where a forward contract would work best. A forward contract allows you to lock in both basis and futures price. You establish a cash price for your intended delivery month.
There are more pricing decision tools that can be used. The three listed are recommended for several reasons. There is no set number of bushels you need for a contract. There are no margin calls or minimum balances to maintain. Best of all, you can work with local people that you already know.
For more information on grain marketing, review MSU Bulletin E-3416: Introduction to Grain Marketing.