In March I blogged about an incredible inverse in the cash soybean market – nearby soybean prices were about $2.50/bu. higher than new crop bids for soybeans delivered in the fall. I saw some evidence that the inverse could continue strong into spring and it has; nearby soybean prices reached $3.50 premium to new crop in mid-May. Summer is looming and it is time to face facts – sometime over the next 90 days, this inverse (like the corn inverse) will be resolved, i.e. “nearby” and “new crop” will morph into one and trade at the same price.

When and how will the resolution occur? Will spot prices fall to new crop levels, or will new crop bids rise to the higher nearby levels? Since 1990, there have been five other years with soybean inverses similar to this year; 1996/1997, 2003/2004, 2007/2008, 2008/2009, and 2011/2012.  My definition of similar is years when nearby cash corn prices reached at least $1/bu. higher than new crop bids, sometime in the year before harvest.

When and how did the resolution occur in these years?

1996/1997: The inverse was resolved in August and first-half September, when spot prices crashed down to new crop levels.

2003/2004: This was a wild ride and, as the chart shows, it looks very similar to the current pattern. The inverse was resolved in July, when nearby prices crashed from over a $3 premium to less than a 50 cent premium in less than 3 weeks. Wow!

2007/2008: Resolution came early – in May – when spot prices crashed towards lower new crop levels.

2008/2009: The adjustment was made in late August/early September. My records show that in a period of one week, nearby prices fell nearly $2.50/bu. while new crop bids dropped 80 cents.

2011/2012: Last year was a drought year and, while nearby and new crop prices started to rise sharply in June, the resolution of the inverse occurred in August.

Like corn, the inverse in each of these years was quite volatile, with 25-50 cent swings not uncommon during the summer months. An adjustment is coming and it will be jolting!

Three months ago I offered my thoughts on an incredible inverse in the cash corn market. Nearby corn prices were more than $2/bu. higher than new crop bids. Despite a quick downward adjustment (severe crash?) after the March grain stocks report, the inverse of nearby corn prices vs. new crop bids has climbed back above the $2 mark.

It is now early June and I am prepared to make a bold prediction: Sometime over the next 90 days, this inverse will be resolved, i.e. “nearby” and “new crop” will morph into one and trade at the same price. When and how will the resolution occur? Will spot prices fall to new crop levels, or will new crop bids rise to the higher nearby levels?

Since 1990, I can find three other years with inverses similar to this year.  My definition of similar is years when nearby cash corn prices reached at least $1/bu. higher than new crop bids, sometime in the year before harvest. These years include 1995/1996, 2010/2011, and 2011/2012.

When and how did the resolution occur in these years?

1995/1996: In terms of severity of inverse and the stocks carryout situation, this year matches up closest with the current year. The inverse was resolved in late August and into September, when spot prices crashed down to new crop levels.

2010/2011: This was the least wild of the sample years – the corn inverse topped $1/bu. several times, but not by much. The inverse was resolved in late July and August and, like 1995/1996,  spot prices crashed down to new crop levels.

2011/2012: Last year was a drought year, and the resolution occurred in June, as new crop bids screamed higher.

The inverse in each of these years was quite volatile, with 25-50 cent swings not uncommon during the summer months. While the timing was different in each year, we can say that once it began, the resolution of nearby and new crop prices occurred rapidly. In each of these years, we can pinpoint a two week period when most of the adjustment occurred.

Let’s talk about two types of transactions that many people confuse; forward and futures contracts. They sound similar, but they are distinctly different contracts in terms of where and how they are traded. The key differences include….

1. Futures are traded only on organized exchanges. Forward contracts are traded in decentralized markets.
2. Futures contracts are standardized. Forward contracts are tailored to meet the needs of a specific transaction.
3. Trading in futures is formalized under exchange rules that govern trading.
4. Futures contracts are usually not satisfied by delivery (roughly 1% of futures contracts traded end in delivery). Forward cash contracts end in delivery.

Join today at
http://www.CommodityChallenge.com

Like us on
http://Facebook.com/CCticker

Follow us on
http://Twitter.com/CCticker

A futures contract is a contract to deliver or take delivery of a commodity in some future month at a price determined by auction in an organized commodity exchange. The auction once occurred in a trading pit, but most trading has migrated to electronic platforms. The terms of a futures contract — delivery time, grade, and place are standardized by the exchange. The only thing negotiated between buyer and seller is price.

—

Join today at http://www.CommodityChallenge.com

Like us on http://Facebook.com/CCticker
Follow us on http://Twitter.com/CCticker

In a Post-harvest (or “Old Crop”) game you’re a producer and your crop has already been harvested, it sits in storage and you can make a decision to sell that in the cash market, that is, today’s market to your local elevator at today’s price…or in the Forward Market the Futures Market or the Options Market.

Now, in Pre-harvest marketing or what we might call a “New Crop” Game harvest hasn’t occurred yet it may be months in advance, and your options for selling that grain are more limited, you have no cash grain to sell there’s nothing physical in inventory.
So you are limited to Forward Contracts, Futures Contracts and Options Contracts to price your grain.
—
Join today at http://www.CommodityChallenge.com

Like us on http://Facebook.com/CCticker
Follow us on http://Twitter.com/CCticker

I’ve taught a course on futures and options many times. The math is straightforward but many students struggle with the lingo. Let’s talk about bulls and bears, and longs and shorts.

A market bull is some who thinks prices are going higher. Bulls use their horns to push prices higher. Bears think prices are going lower – they use their paws to beat prices down. If you are bullish, you look to be “long” the market – you look to buy futures. If you are bearish, you look for ways to “short” the market – you look to sell futures.

In Commodity Challenge you play the role of a grain producer and you have an ownership position – a long position – when the game begins. Your job is to maximize revenues using futures and options as risk management and pricing tools.

Join today at
http://www.CommodityChallenge.com

Like us on
http://Facebook.com/CCticker

Follow us on
http://Twitter.com/CCticker

A cash transaction is simply a cash sale of grain you own which is taken out of storage.

For example: If you take today’s spot price for soybeans and you’re selling them for ten dollars a bushel and you’ve got 10,000 bushels of soybeans. You are going to price and deliver that to your local elevator and that elevator is going to write you a check for $100,000.

$10/bushel * 10,000 bushels = $100,000
—
Join today at http://www.CommodityChallenge.com

Like us on http://Facebook.com/CCticker
Follow us on http://Twitter.com/CCticker

The new Commodity Challenge is up and running! Here are five things you need to know about the new game and website.

1. Everyone must register anew with the new website. As before, registration is easy and free (game set-up also remains free thanks to generous sponsorship support from MN Soybean, Farm Credit and the North Central Risk Management Education Center). You will find a portal to the old site on the sign-in page.

2. Commodity Challenge has a great new look! There is a sign-in page, a home page and, once you join a game, a dashboard for playing a game. Players will find it to be very intuitive and easy to navigate. Use the feedback tab if you have suggestions or questions about game play or the site.

3. The new game features position limits that are tied to grain production. This feature emphasizes Commodity Challenge as a game for risk management education, and not for speculative trading. If a players position (owned or sold) is greater than production, they will receive message reminders that they need to take offset an existing position or cancel an open order to get in line with production.

4. Game leaders, have access to reviewing the actions of the players in your game – they have the power to manage a game!

5. Cash market selection is much broader – as broad as the reach of GeoGrain. GeoGrain is a service that gathers grain quotes from thousands of local cash markets each day. Your game can be customized to display local grain quotes relevant to you and your group. We can even offer daily quotes on forward contracts – your Commodity Challenge game can be an “old crop” game (bushels harvested and in storage) or a “new crop” game (bushels to be harvested months in the future).

Would you like to start a game on the new website? Send me an email with the following info: location (city and state), start date, end date, grains to trade (corn, soybeans, HRW wheat, SRW wheat, HRS wheat), and bushels.

I received an interesting question about storage.

Question: Ed, I farm corn and soybean in west central MN. I am very short on  grain storage. Most  of my hauls to the coop that I do business with are with in 6 miles or less, waiting time to unload has, for the most part, not been bad, but there are days. Can you give me some advice on grain storage? I don’t see it as a slam dunk to build like many others,or am I missing the boat and should build storage for at least a portion of my production Can you show me that it is not a losing proposition but a good investment.

My reply: You’re asking a really good question, and I will try to give you a simple answer.

It is difficult to make the case for building storage based on its value in “marketing.” Yes, I know there have been recent years when corn and soybean prices increased $1-2 after harvest and, in hindsight, new storage would have paid for itself in one year. As nice as this story is, there are also years when farmers used storage to turn $4 corn into $3.50 corn 8 months later. In my opinion, the challenge with storage and marketing is the insistence of storing grain after harvest, whether or not the market calls for a storage strategy.

Now let’s look at a different reason to build storage – its value to the farm operations. You hinted at this need when you said, “waiting time to unload not been bad, but there are days.” As local elevators continue to consolidate and farms get larger, more farmers are making the case for storage based on operational needs alone. They argue it is not possible to harvest their large crop in a timely manner if the bulk of their harvest must be driven to town and someone has to wait 25 minutes to unload. Harvest must be timely – no waiting!

These people build storage to support the operational needs of their farm (and typically add drying facilities at the same time). The benefits from marketing – over time I believe they will be more positive than negative – are an “add-on” to the operational need.

I suggest you look at your farm and think about whether or not storage capacity will add value to the operations side of the business, as well as the market side. If it brings operational value, I like to think you just added equity and value to your entire farming operation. Hey, we both know farmers who are paying $12,000 per acre to expand and add value to their operations. It’s quite possible that new storage is a more effective way to add value to your farming operation.

Good luck with your decision. If we can get the temps above 30 degrees, we can start to think about planting.
Ed

Like corn, the “spot” price for soybeans is $2/bushel higher than new crop bids (Southwestern Minnesota prices). This is a strong inverse, similar to levels seen in 2003/04, and higher than the inverse seen in 1996/97 (two years of note for strong inverses).

I see two items of interest in this chart. First, in 1996/97 and in 2003/04, the inverse gained strength in the spring months – this offers some comfort to farmers who continue to store old crop soybeans. Second, when the inverse gives way in mid-summer, it gives way very quickly. In late July/early August of 1997, the inverse dropped nearly $1/bushel. But that’s nothing compared to the nearly $3/bushel drop in late July of 2004. In each case, it was the old crop price that collapsed down to new crop values and not vice-versa.

Every inverse is eventually resolved. If you are holding soybeans, don’t stay at the party too long.