Carl German, Extension Crops Marketing Specialist; clgerman@udel.edu
Frost Scare Increases Market Volatility
On Tuesday of this week the National Weather Service issued a 7 to 10 day forecast that included frost over the Northern Plains to possibly occur toward the later part of next week. On Wednesday the forecast had changed somewhat and the magnitude of the area to possibly be impacted was significantly reduced. Such is the nature of ‘weather’ markets. On Tuesday, new crop corn and soybean prices increased by the daily limit for corn and nearly the limit for soybeans. During day trading on Wednesday, corn and soybean futures gave back a portion of the Tuesday rally. We can expect this type of volatility to continue until the frost scare actually materializes or simply goes away. A frost occurring before U.S. row crops fully mature would reduce the national average yield estimates for U.S. corn and soybeans and their production estimates to some degree, while a non-frost event will likely result in big crops getting bigger for both corn and soybeans. Yesterday afternoon (September 17) Dec corn futures closed at $3.36; Nov soybeans at $9.50; and Dec SRW wheat at $4.67 per bushel.
Market Strategy
This time of year, with harvest just beginning on the Eastern Shore, can be likened to no man’s land when it comes to making marketing decisions. It has been well documented that the corn market is reflecting a carry as depicted by the spreads between the nearby and the more distant futures contract months (Dec ‘09 at $3.36; Mar ‘10 at $3.49; May ‘10 at $3.58; and July ‘10 at $3.67 per bushel). Many analysts are of the firm opinion that it will pay to store unpriced corn and to sell the carry. Selling the carry means that one would have to either hedge the stored corn in the futures market; buy put options against the stored corn; or sell a forward contract in the cash market in order to capture the carry as well as any potential basis gain.
Another alternative that may be worth considering for some would be to sell calls against the stored corn. If exercised, the call position would result in a short futures position, providing downside price protection at the chosen strike price. If not exercised, then the call seller would keep the initial premium received when selling the call, currently valued at 19 cents per bushel for a July ‘10 call option with a $4.40 strike price. Obviously, if not exercised then any stored corn covered by the call option would be open to downside price risk exceeding the 19 cent per bushel premium that the call seller receives for selling or writing the $4.40 call. Purchasing call options also limits upside price potential above the $4.40 strike price. Therefore, selling calls against stored grain is best used when the underlying futures contract is not expected to rise much above the initial strike price of the call option. Calendar-wise it is too early to be making said decision, however, selling calls is currently being mentioned in the media due to the current cost of the put option. If one were to opt to buy a July ‘10 $4.40 strike price put option today it would cost 91 cents per bushel [$4.40 strike price – .91 premium cost + .25 over basis (estimated) – .01 commission cost = $3.73 MSP]. Not a very viable option by many marketers standards at the present time due to the premium cost. As we get deeper into harvest and near the end of the calendar year this alternative could become more viable. Buying put options against stored grain does give downside price protection by locking in the minimum selling price (MSP) while leaving the option buyer open to upside price potential in excess of the premium paid.
Grain marketers can also capture the carry by taking a forward cash contract for some future month of delivery (Jan ‘10; May ‘10; Mar ‘10; or July ‘10). For example, a July forward cash contract can currently be taken at 35 over or $4.02 per bushel. Effectively, one is locking in downside price protection, any price below $4.02, while giving up upside potential, any price move exceeding the $4.02 per bushel contract price. Bear in mind that this is a good way to capture the carry when the opportunity arises.
The carry in the soybean market is currently flat (Nov ‘09 at $9.50; Jan ‘10 at $9.55; Mar ‘10 at $9.58; May ‘10 at $9.56; and July ‘10 at $9.58 per bushel). Earlier this summer we were looking at an inverse carrying charge in soybeans. The indicator one gets at this point in time is that storing soybeans is not likely to pay.
Other factors worth noting: indicated carries in the futures market do not always materialize. However, the stocks-to-use ratios reflected in corn and soybeans would seem to indicate that a rise in corn prices and a drop in soybean prices could occur over time. Currently, the ratio for U.S. corn is at 12.6%. Currently, the U.S. is the main supplier of corn and soybeans to the world market. That will change when the Southern Hemisphere harvest begins, after the turn of the year. The world stocks-to-use ratio for ‘09/‘10 marketing year soybeans is currently at 21.8%.
For technical assistance on making grain marketing decisions contact Carl L. German, Extension Crops Marketing Specialist.