Saying “things are different” in 2020 is to state the obvious about the impact of COVID-19 on just about everything. But there may be one corner of the grain market where the cliché is more nuanced, and that could impact your storage decision for corn as harvest begins to head down the home stretch.
Despite a big crop here in the U.S. and more than ample supplies, average basis levels are surprisingly decent. Even more noticeable for hedgers: Carry in the futures market is at very low levels. That’s making it more difficult for farmers to protect inventory they’ll store on farm into 2021 by selling futures or hedge-to-arrive contracts while they wait for the cash market to strengthen.
Related: World corn supplies shrink
Average corn basis ended last week about 25 cents under December futures, which closed above $4 a bushel for the first time since January. But the July 2021 contract settled just 7.25 cents about the nearby, after nearing only a nickel on Thursday. The lack of carry for commercial traders – it’s less than the storage fees for a month of corn in a deliverable position – was a tip-off that something indeed is up.
The combination of carry plus basis appreciation on the nearby combine for anticipated storage returns from a hedge, after accounting for depreciation on bins and paying interest on unsold grain and fees for storage, handling and trades. Tight carry at harvest doesn’t make it impossible to turn a profit on a storage hedge. But small spreads between December and contracts for delivery in the spring and summer make it harder for this strategy to pay off.
China is also buying wheat and, most of all, soybeans. And after disappointing 2019 harvests, new crop must get into position for exporters. Shippers are scrambling for railcars to the Gulf and Pacific Northwest, sending the cost of shipping corn from Minneapolis to the West Coast up by almost 25 cents a bushel.
Closure of key locks on the Illinois River, where deliveries against futures focus, may also be working into the equation. While most of the repairs are done, the need for empty barges sent October barges on the Illinois River to their most expensive level since 2015. Low water on the lower Mississippi River is also tying up traffic and increasing congestion, limiting availability of empties. Bull-spreading makes sense for users who must complete with Gulf corn basis trading nearly double its five-year average.
The tight carry market does have one benefit for farmers. Those without on-farm storage, or who need to raise cash, may find it a little easier to move grain now and replace it with deferred futures or options. Buying an at-the-money July 2021 corn call still isn’t cheap: the $4.10 strike closed at 24.25 cents last week. But overall modest implied volatility and lack of carry make the calls a little bit better value, even if the Farm Futures storage strategy studyshows the odds of a profit are slim.
Still, growers with stronger harvest basis than they anticipated may want to take a look at just selling some off the combine. According to the National Corn Index of 3,175 elevators at the Minneapolis Grain Exchange, the average corn price Friday was $3.78. That’s just three cents a bushel away from the full economic cost of production based on USDA’s Oct. 9 yield projection. And if more realistic costs for machinery are used, current price net a cash return of 40 cents a bushel.
Post time: Oct-27-2020