The time to ponder your marketing options postharvest is before combines start rolling. Your best alternatives are limited to selling at harvest, storing grain on-farm for sale later in the crop year or storing grain and selling the carry. Call options add a twist to the mix — the opportunity to re-own a sale and protect the upside. With harvest looming, here are my thoughts on postharvest marketing in 2009.
CORN: The corn market is sporting large carrying charges into next year. By my calculation, a carry of 30¢ from December 2009 to the July 2010 contract is over 300% of my interest costs on borrowed money to finance corn held in storage — that's a large carrying charge by any measure.
I like to sell large carrying charges. I do it by placing my corn into on-farm storage and selling futures on a deferred contract (paying a commercial rate of 4¢/month will take the fun out of this transaction). Selling the carry is a conservative approach to marketing that offers four distinct benefits:
- I hedged against lower prices.
- I put a 30¢ carry to July in my pocket.
- I can add even more from basis improvement later in the crop year.
- I defer income and taxes into the next calendar year.
Between the carry and basis improvement, I expect to add 40-50¢/bu. to my price of corn at harvest.
I can think of just one disadvantage to selling the carry in corn: Should the market reignite into a new bull market, selling the carry limits your upside potential to the size of the carry and basis improvement.
SOYBEANS: Large carrying charges are a rare occurrence in the soybean market, and this year is no exception. Selling the carry makes no sense when carrying charges are small or inverted. This year, my best choice boils down to holding unpriced soybeans in storage or selling at harvest. Cash prices and the basis are good for harvest — I'm leaning toward selling my soybeans at harvest.
When we think harvest, we think low prices. But the record in soybeans shows that a harvest sale beats spring prices (net of variable storage cost) and a re-ownership strategy in five of 20 years — not a rare occurrence. Sometimes a harvest sale is your best alternative.
PROTECTING UPSIDE POTENTIAL
If I store corn and sell the carry, that takes away my opportunity to benefit from a postharvest rally in prices. Ditto for selling my soybeans at harvest. Should I be worried about my upside potential?
The way I see it, you have two ways to protect the upside after harvest. The first is the ever-popular re-ownership strategy with call options. An at-the-money July 2010 call option will cost nearly 50¢/bu. in corn and more than $1/bu. in soybeans. Good luck.
Let me suggest a different way. Write a preharvest marketing plan for your 2010 corn and soybean crops — the crops you will harvest one year from now. Should the market rally, you get to make some early and profitable sales of next year's crop. This approach allows you to benefit from a price rally after harvest and it will not cost you a penny.
It's your choice.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at firstname.lastname@example.org.