Most farmers are flush with grain again after the 2018 season’s harvest produced record national yield averages for corn and soybeans. And for yet another year, farmers are forced to make ‘sell-or-store’ decisions in an unfriendly market environment.
Cash flow needs and the risk of further price erosion often warrant a need to sell for many farmers. But, the choice to store grain is a tempting one when flat prices are depressed and the futures market offers a carry incentive.
Whether grain is sold or stored, an appropriate marketing strategy can be matched to the decision to help with managing risks related to selling too soon or storing for too long. Stored bushels can be protected with storage hedges while sold bushels can be coupled with re-ownership hedges.
Grain on storage can be hedged to lock in carry – a premium for storage costs built into deferred futures contracts and forward cash bids. Take advantage of the strong current carry structure by selling futures in a brokerage account or opening hedge-to-arrive (HTA) contracts with your grain buyer. Compare the futures carry incentive against your own costs of storage, whether on-farm or at an elevator, and factor in additional costs related to brokerage commissions or HTA fees.
Storage hedges establish a futures price while leaving the position open for changes in basis, therefore they can provide benefit to the producer when basis values are expected to strengthen. Basis generally shows seasonal weakness during harvest when grain movement is at its maximum and tends to strengthen in the spring and summer when farmer selling is slow and uncertainties about the next crop exist.
Re-ownership hedges serve to re-open the position to participation in potential upside in the futures market. The strategy most often entails selling cash corn and capturing upside opportunity through the purchase of call options.
Buying call options against a sold cash position establishes a price floor since risk on the option contract is limited to premium cost, plus commission and fees. The transfer of cash grain ownership is already complete, so the strategy does not benefit from potential basis appreciation.
Open a storage hedge using short futures, long put options and HTA contracts. In general, the best time to use a storage hedge is when protection is needed against falling futures prices, when basis has the potential to strengthen and when the net return to storage offered by a carry market represents an acceptable profit.
Employ the re-ownership strategy by opening a minimum price contract at the elevator or through the purchase of call option contracts against cash grain already sold. Consider such a replacement hedge when the outlook calls for stronger futures prices and steady or weaker basis.
The market may offer an attractive carry incentive, but that premium is not guaranteed to the producer until a futures price is locked in – that is where the storage hedge comes in. A sale may sometimes be necessary even if it is not made at a desirable time or price – that’s when the replacement hedge can help.
Camp is the risk management specialist for AgriVisor, one of WFBF’s member benefits. This commentary first appeared in WFBF’s publication Rural Route.