The famous line, “You got to know when to hold ’em, know when to fold” from the Kenny Rogers song “The Gambler” also rings true in grain marketing.
Which grain to hold in the bin and for how long is influenced by many factors. Certainly an important component is your storage infrastructure.
How much bin capacity do you have? What are your pricing strategies and do you have access to all the hedging tools like options and futures?
Another component is the commodity’s price itself. What are current and future prices saying about the underlying supply and demand of the market? Combined, these key components will help shape your storage and marketing strategy.
To start, most clients tend to have sufficient space to store all or the majority of their production. In fact, Farm Credit Canada noted in one of its recent FCC Knowledge articles that “Canadian grain farmers, particularly those on the Prairies, have more grain storage than almost any of their worldwide competitors.”
Storage capacity is certainly an advantage for Canadian growers compared to the U.S., where on-farm storage is less relied upon by growers.
At the same time, however, there is a big difference on each side of the border when it comes to the use of hedging tools like options and futures. Since the U.S. has less farm storage, U.S. farmers tend to use futures or options at a much greater rate than Canadian producers. About five to 10 per cent of Canadian farmers use options and futures compared to 30 to 35 per cent in the U.S. So how can Canadian farmers use both storage and hedging tools to their advantage?
First, though, what are cash and futures prices telling us about the economics of the marketplace? Before we can look at the price component, just what is the price for storing grain? In a recent release by the University of Nebraska ag economics farm management department called 4 Ways to Improve Your Grain Marketing, they highlighted knowing your storage expenses as a key consideration when deciding when to market your grain. I’ve seen storage costs calculated at anywhere between five and seven cents per bushel per month when you factor in purchase price, setup costs, depreciation, repairs and maintenance, financing costs on the bin and time value of money on the grain in storage.
So, with all that in mind, the questions still remain: Do you store or sell your grain? If you sell, for which delivery period? We’ve all heard the saying, “Sell grain when the market wants it; store grain when it doesn’t.” Fortunately, we can look at the futures forward curves to give us insights in to when the market wants your grain. What are price trends and forward futures price curves telling us right now? And, how can we use this information to analyze and create effective and efficient marketing strategies?
At the time of writing this article in mid-February, the soybean futures market is trending higher and heavily inverted such that delivery prices for the end of next year are trading at only 75 per cent of nearby current prices. Canola prices are very strong and the difference between new and old crop is heavily inverted as well. In this case, an inverse carrying charge is like a negative storage cost. All else being equal and assuming prices don’t go much higher from here, you should get more money from selling your grain today than holding on to it to sell next month or next quarter. Inverse carrying charges are a good indication of a current shortage. However, the important thing to realize is that forward curves are not necessarily a forecast of future prices. Rather, they just reflect existing supply and demand for different delivery periods as well as the carrying costs.
But, with underlying soybean, corn and canola prices in a strong upward trend, there could still be some more upside potential available. Options are ideally suited in this type of situation since you can sell the physical crop and then replace with options strategies.
This way, you can sell your grain, put cash in your pocket, clear some bins, not have to worry about spoilage, reduce your price risk and still profit if prices go higher. Or, if you don’t believe prices are headed higher and you’ve already met or exceeded your profit target levels, you could just sell the physical grain and be done with it.
Hard red spring wheat is a different story since it has an upward rising futures curve meaning that wheat delivered in a year is trading at around 105 per cent of the nearby price. Under conditions like this, you could make a deferred deliver sale, depending on whether basis levels are good or not. If basis levels are poor or you are concerned about your grades or proteins levels, you can use options strategies or a futures hedging program to capture the carry in the market, protect against the downside and still participate in some upside as well.
Bottom line, the shape of a forward futures price curve and how it interacts with your storage assets and hedging tools like options and futures can all help with your marketing decisions. A marketing strategy structured for a carry market like wheat is not necessarily the best approach for an inverted market like canola or soybeans.
Once again, though, you need to use all these hedging tools so you can fine-tune your marketing strategies. With them, you can better protect against lower prices, capture the storage opportunity for yourself, take advantage of any better basis levels down the road while still being able to participate in some upside if prices continue trending higher.