FOCUS ON AG
October 10, 2022
THE DECISION TO SELL OR STORE GRAIN ?
Many farm operators will tell you that grain marketing decisions are one the hardest part of farming. This is especially true during times of highly volatile markets such as have been occurring in the past couple of years. Farm operators are concerned with inflation and the rapidly rising input costs, wanting to make sure that they keep their working capital strong for the 2023 crop year. In addition, the current tight local “basis” level for grain comes into play when making a sales decision for the 2022 corn and soybean crop.
Both corn and soybean prices rose significantly throughout the current growing season and have remained quite strong into harvest. This has improved the overall profitability projections for most Upper Midwest grain producers for 2022. The continued strength in corn and soybean prices has been driven by a combination of grain stocks adjustments by USDA, lower than anticipated U.S. corn and soybean production in 2022, and reduced South American crop production, as well as very strong domestic and export demand for both commodities. Some analysts feel that USDA may make further downward adjustments in 2022 estimated corn and soybean production, based on the limited rainfall and drought conditions in portions of the Western Corn Belt.
Nearby December corn futures on the Chicago Board of Trade (CBOT), which affect local cash corn prices, closed at $6.83 per bushel on October 7, which is nearly a $1.00 per bushel higher than in mid-July. It is quite unusual for corn futures to rise significantly after July and stay strong into harvest season, unless there is anticipated reduced crop production due to a drought or some other cause. The “new crop” CBOT corn futures in 2022 started the year near $5.60 per bushel in mid-January, then rose to $7.00-$7.50 per bushel from April until mid-June, before dropping below $6.00 per bushel in July and then rebounding to current levels. CBOT December corn futures have traded above $6.50 per bushel for a majority of the time since late August.
CBOT “new crop” soybean prices have also remained quite strong in recent months, though not at the same level as corn prices. USDA has been a bit more optimistic about 2022 U.S. soybean yields and production than with corn, and USDA recently increased the level of 2021 carryover soybean stocks. Nearby CBOT November soybean futures closed at $13.67 per bushel on October 7, which has declined by over $1.00 per bushel since mid-September. November 2022 CBOT soybean futures started the year at just over $13.00 per bushel, before rising to over $15.00 per bushel most of the time from mid-April until mid-June. Soybean futures traded from $13.50 to $14.25 per bushel during most of July and August, before declining to current levels.
Local grain elevators, ethanol plants and processing plants generally set their bid prices based off the CBOT futures price for a corresponding month. The difference between the local cash price being offered in a given month and the closest CBOT futures price is known as “basis”. The basis levels for both cash corn and soybeans have remained at very strong levels throughout most of 2022. In fact, there has been a significant “positive basis” for corn in the past few months at many processing plants and local elevators in the Upper Midwest, meaning that the local cash price is higher than the CBOT price. This situation does not occur very frequently in the Western Corn Belt, especially heading into harvest season.
For example, basis levels for the 2021 corn that was still in storage and 2022 corn that was harvested early was at a positive level of $.20 to over $.50 per bushel above the CBOT futures price in late September at many locations in the Upper Midwest. Soybean basis levels at regional processing plants also remained very tight into late September, with some plants briefly offering positive basis levels. The current basis level in Southern Minnesota for the 2022 corn and soybean crop being harvested is about $.20-$.50 per bushel lower than CBOT prices at most local grain elevators and processing plants. However, the basis levels improve significantly for grain that is stored and sold after harvest in December or January.
Generally speaking, when there is a positive or extremely tight basis level for cash corn and soybean, such as currently exists, farmers should look to take advantage of those opportunities to market some of the unpriced corn or soybeans that are being harvested. The nearby CBOT corn or soybean futures price could increase in the coming months but if the basis at the local grain elevator or processing plant widens at the same time, the cash price to the farmer may not change. While a $.50 per bushel widening of the basis may not sound that significant, that amount represents $50,000 on a grain bin with 100,000 bushels of unpriced corn. This could make up a considerable portion of the profit margin for the 2022 corn crop.
Many producers have utilized “hedge-to-arrive” grain marketing contracts in the past to lock-in a price on corn or soybeans prior to harvest, and then store the grain until the following Spring or Summer for improved local cash prices. A typical “hedge to arrive” contract locks in the futures price and allows the local price to be determined at a later date. The concept is that the basis level usually narrows during the first half of the year following harvest, as the grain supplies grow tighter. In most years, the basis level for local cash grain prices is usually quite wide at harvest time and then narrows in future months. This scenario did not occur with the 2021 corn and soybean crop and will likely not occur with the current 2022 crop. The current tighter basis levels at harvest mean that positive results from typical “hedge-to-arrive” grain marketing contracts might be very limited.
It is important for producers to remember that tight basis levels at local grain elevators and processing plants are mostly driven by local demand for corn and soybeans. Once that demand is met, basis levels tend to widen back to more typical levels. As we have seen in recent months, basis levels can vary considerably from day-to-day at local grain elevators, feed mills, and processing plants, depending on the immediate need for corn and soybeans. Paying attention to basis levels and understanding the factors that affect basis can play a big part in the success of a farm grain marketing plan.
Farm operators also need to factor in the cost of storing the grain when considering grain marketing decisions. The rapid rise in the short-term interest rates to 6-7 percent or more has become a factor in grain storage decisions, especially if farmers have an operating line of credit that they are currently paying accrued interest on. When all factors are considered, the cost of storing corn or soybeans for six months can range from $.25 to $.50 per bushel. The main reasons to capture reasons to store grain are usually to capture improved commodity prices or stronger basis levels in the Spring and Summer months, which will enhance local cash bids in the later months.
Currently, cash corn bids at grain elevators and ethanol plants in Southern Minnesota are near $6.50 to near $7.00 per bushel, which is nearly the same as the bids being offered in the Spring and Summer of 2023. Similarly, cash soybean bids at local elevators are currently near $13.00 to $13.50 per bushel, with higher prices at soybean processing plants, which again is similar to prices being offered in the first half of 2023. The current grain market scenario is currently not offering much incentive to store corn and soybeans into the Spring and Summer of 2023. Some farmers may choose to store and price grain for December or January delivery for tax management purposes and to capture a few extra cents per bushel.
Many farmers have had some difficulty making grain marketing decisions for the 2022 corn and soybean crops. Being able to “lock-in” local cash prices over $6.00 per bushel for corn and over $13.00 per bushel for soybeans is the best opportunity that has existed during harvest season in many years. On the other hand, farmers do not want to miss another grain price “run-up”, given the current tight U.S. grain supplies. It is important to remember that the catalyst for another commodity price increase next year might be continued or worsening U.S. drought conditions as we head into the 2023 growing season. If a major drought does not develop in 2023, corn and soybean prices are likely to follow a more typical seasonal price pattern next year. No two years are the same, but historical price trends are something to keep in mind in analyzing grain marketing strategies for the 2022 crop.
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960) E-mail — kent.thiesse@minnstarbank.com) Web Site — http://www.minnstarbank.com/