“There are only 8 cents of carry out to the May futures contract; how am I supposed to go to my banker and justify putting up new grain bins just to get another 8 cents per bushel? That math doesn’t work out!”
This question came up at a recent market outlook meeting, and the economic instincts behind the questioner’s details were spot on. He was considering funding a project with borrowed money based on the returns offered to him in the current market environment. He was looking at the actual carry in the futures spreads, which can be locked in as real income, instead of looking at some unreliable expectation that grain prices “might” tend to be higher in the spring than they were at harvest when the grain went in a bin.
However, I would encourage anyone considering the construction of new grain storage facilities in 2019 (and I imagine there are many such people, after the scramble to store both corn and soybeans in late 2018) to base their decisions on longer-term expectations. The 8 cents of carry currently offered between the March and May 2019 corn futures contracts (which is still a relatively generous 65% of the full cost of commercial carry) doesn’t mean much. Few market participants come into possession of some corn in March that they only intend to store for a couple of months. More typically, someone comes into possession of some corn at harvest time. As an example, this marketing year on Nov. 1 there was 20-plus cents of carry between the December and May futures contracts that could have been used to justify an investment in grain storage. There was 30-plus cents of carry available from the December 2018 to September 2019 contracts for those who were willing to commit to storing the grain for so long.
An expectation of being able to lock in an extra 20 or 30 cents per bushel for one’s grain … now, that’s something a person could take to a banker and make a grain storage facility sound like a good investment. But how confident should that expectation be, year after year after year?
Let’s look at recent history. There were those wild years — 2011, 2012 and 2013 — when corn supplies were extremely tight and nearby futures spreads actually inverted during the spring and summer months (near-dated corn futures were priced higher than far-dated corn futures). That experience jolted many corn producers’ internal calibrations about how corn prices are expected to behave seasonally. But, since that time, nearby corn futures have inverted only rarely, briefly and mildly — in mid-2014 and mid-2016. Mostly, we’ve been living back in the “normal” world where there is plenty of grain to go around, and the futures markets are structured so that future prices pay more for far-dated grain and reimbursing owners for the costs of keeping the grain in storage and off the physical market.
Since the 2013 corn harvest, if we took a market snapshot on Nov. 1 of any subsequent year to illustrate the harvest-time storage decisions of a farmer with newly harvested grain, we would see that the December-to-May futures spread has offered fairly generous “carry” spreads in each of these past six years: 18 1/2 cents for the 2013 corn crop, 21 1/4 cents for 2014, 14 1/2 cents for 2015, 16 cents for 2016, 22 1/4 cents for 2017 and 20 cents most recently on Nov. 1, 2018.
This is cash money that the futures market offers to owners of grain. If, for instance, a farmer owns some harvested bushels already hedged with a short December corn futures position (perhaps hedged months earlier at a very favorable price), the farmer can choose to “roll” that futures position forward. That is to say: buy back December futures and simultaneously sell May futures. Then the farmer will pocket the futures spread (let’s assume 20 cents or so) as cash in a futures brokerage account. Alternatively, a farmer can roll a hedge-to-arrive contract forward within the same marketing year and receive the 20-cent advantage. Alternatively, if the grain hasn’t been hedged or sold yet, the farmer can simply choose to sell the grain, at harvest, for a timeframe six months in the future and receive a subsequently higher price in return for agreeing to store the grain until spring delivery.
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Note that this opportunity is different from the opportunity to store unpriced, unsold, unhedged grain in the blind hope that prices may be higher in a few months’ time. Lots of people do this; lots of people justify their investments in grain storage facilities based on that seasonal expectation for better flat prices in the spring or summer, and lots of people generally succeed most years with this strategy. Over the past six years, the flat price improvement of the National Corn Index from Nov. 1 (harvest time) to the following May 1 (six months later) has been 66 cents in 2013 from $4.03 to $4.73, 10 cents in 2014 from $3.33 to $3.43, 6 cents in 2015 from $3.50 to $3.56, 31 cents in 2016 from $3.06 to $3.37, 61 cents in 2017 from $3.07 to $3.68 and 16 cents, so far, from $3.28 on Nov. 1, 2018, to $3.44 on Feb. 12, 2019.
So, you see, sometimes it works really well. But it’s never guaranteed cash-in-hand paid for carrying the grain. Instead, it’s a speculative gamble based on pretty sound seasonal market expectations.
There are less reliable opportunities in soybean futures spreads, and of course even less reliable opportunities in storing unhedged soybeans for months past harvest. But if we continue to experience years of overabundant soybean inventories, that math may also change. In any case, a look at the history shows us that — in a world that expects continued years of abundant grain supply and normal “carry” futures spreads — yes, it is possible to look at grain storage investments and opportunities with some confidence.
Elaine Kub is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at email@example.com or on Twitter @elainekub.