Consider Holding Grain Sales For Later Delivery Pricing, If Math Works
By Matt Brandyberry
Basis levels for November-December 2021 delivery are higher for farmers’ delivery locations east of the Mississippi, when compared with the harvest pressure placed upon the cash markets. For farmers, basis is one market signal to monitor, because it can help you decide whether to hold or sell unpriced crops out of the field when harvest ends, when on-farm storage becomes full, or faced with price later at your preferred delivery location.
For locations that haven’t lowered basis yet, it may be coming and this could be a clue to sell some of the crops out of the field. This would be prudent especially if storage is going to be an issue and the elevator is charging, for example a 30-cent drop charge. For locations that have already lowered basis significantly, it means they may be getting increasingly full as harvest progresses or demand is weaker because of transportation issues. It may also be that need to scatter delivery timeframes across upcoming months after the first of the year.
If there is a big enough difference to offset on-farm storage fees compared to the elevator, then it may be best to hold the crop until a later delivery period. Pricing can be completed through forward contracting for delivery after the first of the year on old crops if a producer has storage in this scenario.
This would reduce risk as futures prices are up versus previous harvest time prices. For price later crops, the crops are going to be linked to the nearby and can be thought of as a call option. Basis and the spread between the December and March futures should be checked. A savvy farmer I know has always said 10 cents between futures contracts and storage pays for itself. A rise in futures would be most favorable.
Futures are the big unknown here and our marketing framework suggests holding some crops potentially past your comfort level, because it’s likely possible that supplies of old crops tighten up as we head into the middle of 2022. You may catch a seasonal bounce, and possibly some basis battles in areas where supplies run short.
Looking ahead to new crop is also recommended. Input costs are on the rise as cash prices received by farmers are up and supply chain issues lead to less readily available fertilizer products. The worst-case scenario would be if futures drop and input costs remain up. So, stick with the framework and during overbought periods start working toward the 30 percent forward contracted new crop goal that we at Grain Marketing Plus suggest.
Having a plan like GMP pays for itself through more favorable grain marketing. We look forward to maintaining business with our partner farmers for years to come.