Posted by: usset001 | May 3, 2010

Large Carrying Charges in Corn

Dec'10-Jul'11 Corn Futures Spread

I received an interesting question that got me thinking about traditional and non-traditional ways to measure a large carrying charge.

 “What is a large carry from fall to spring and what is small carry?”

 Carrying charges are the futures price differences between different delivery months (e.g. December and July corn, March and May wheat, etc.). When we talk about a “large carry” we are talking about positive carrying charges, where the deferred futures are trading at a premium to the nearby contracts. There are several ways to measure a large carry. Let me start with a classic measure; percent of full carry.

It is possible to calculate a full carrying charge in the futures market, using the following formula:

full carry =[(price * interest rate/12) + (monthly storage rate)] * # of months

As an example, let’s calculate the full carrying charge in the corn market from the July to the September contract. Let’s use the July price of $3.70 per bushel, 2.25% interest (200 basis points over the 3-month LIBOR rate), and a 5 cent per month commercial storage rate (per current CBOT rules).

Full carrying charge between July and September corn futures = [($3.70 * .0225/12) + (5  cents/mo. storage rate) * 2 months from July to September

= (0.7 cents per month interest + 5  cents/mo. storage rate) = 5.7 cents per month * 2 months = 11.4 cents per bushel

The current carrying charge between July ($3.70) and September corn ($3.785)  is 8.5 cents per bushel. In the trade, we would say that the July/Sep spread is trading at 75% of full carry (8.5 cents actual/11.4 full carry).

Futures price spreads rarely get wider than 90% of full carry for two reasons. First, warehousemen are willing to store grain for their own account for less than the commercial warehouse fee of 5 cents per month. Second, there is a convenience yield to stock ownership – having stocks on hand is a necessary part of operating an elevator or a processing plant ( How can an export elevator load incoming vessels with no stocks on hand? How can a miller supply bakeries with flour without at least a minimal amount of wheat stocks on hand?).

Let’s look at the history of the December/July corn spread in mid-October (harvest time), measured as a percent of full carry from 1990 forward. For the record, I am using the 3-month commercial paper rate (very similar to the 3-month LIBOR) plus 200 basis points for an interest rate, and commercial storage fees as posted by the CBOT in their rulebook. Interest rates and storage fees have, of course, changed over the years.

                Oct 15                  Dec – Jun              Oct 15

                Dec-July               7 months              %

                carry                     full carry               full carry

1990       $0.1925                 $0.47                     41%

1991       $0.2075                 $0.44                     47%

1992       $0.1900                 $0.40                     47%

1993       $0.1450                 $0.39                     37%

1994       $0.2325                 $0.41                     57%

1995       $0.0500                 $0.46                     11%

1996       $0.1425                 $0.44                     32%

1997       $0.1725                 $0.44                     39%

1998       $0.2250                 $0.41                     55%

1999       $0.2325                 $0.41                     57%

2000       $0.2525                 $0.42                     60%

2001       $0.2575                 $0.37                     70%

2002       $0.1225                 $0.37                     33%

2003       $0.1475                 $0.36                     41%

2004       $0.2400                 $0.36                     66%

2005       $0.2700                 $0.39                     70%

2006       $0.1750                 $0.45                     39%

2007       $0.3550                 $0.46                     78%

2008       $0.3975                 $0.44                     90%

2009       $0.2825                 $0.40                     71%

I see several items worth noting. First, carrying charges from December to July never exceeded 100% of full carry (as expected). Second, we’ve experienced our largest carrying charges in recent years – 71-90% in the years 2007-2009. As of the close of the market today (May 3, 2010), the Dec’10-Jul’11 spread is at 29¼ cents, or 77% of full carry – this is the largest Dec-Jul spread I’ve seen since in the last two decades, as of early May! I consider anything over 50% of full carry a “large” carry.

The classic measure of full carry is interesting but complicated. I think a more simple and relevant approach to grain producers is to look at the carry relative to their interest costs on grain held in storage. With this approach I ignore commercial storage costs – they are not relevant to a farmer with on-farm storage. I estimate interest costs using an interest rate of 1% over the prime rate and the cash price (not nearby futures) of corn at harvest.

                15-Oct                   7 months             Dec/July

                Dec/July               interest                carry % of

                carry                      cost                        interest cost

1990       $0.1925                 $0.13                     152%

1991       $0.2075                 $0.11                     184%

1992       $0.1900                 $0.07                     254%

1993       $0.1450                 $0.09                     161%

1994       $0.2325                 $0.09                     249%

1995       $0.0500                 $0.16                     32%

1996       $0.1425                 $0.13                     107%

1997       $0.1725                 $0.13                     131%

1998       $0.2250                 $0.09                     258%

1999       $0.2325                 $0.07                     312%

2000       $0.2525                 $0.10                     264%

2001       $0.2575                 $0.06                     433%

2002       $0.1225                 $0.07                     164%

2003       $0.1475                 $0.05                     281%

2004       $0.2400                 $0.06                     404%

2005       $0.2700                 $0.06                     424%

2006       $0.1750                 $0.14                     121%

2007       $0.3550                 $0.17                     215%

2008       $0.3975                 $0.11                     346%

2009       $0.2825                 $0.08                     333%

Even though the answers are similar, I prefer this approach to measuring the size of the carry. The interest rate (prime plus 1%) is something that the average producer can relate to and interest costs are based on cash prices (and not nearby futures). I can, for example, look at last year and note that the carrying charge from December to July (28¼ cents) was more than three times larger than my interest costs (8 cents) on grain held in storage. By this measure, I consider anything over 140% of interest costs to be a “large” carry. I consider anything less than 140% to be a “small” carry.

By the way, based on today’s Dec-Jul spread of 29¼ cents, and a prime rate of 3.25%, the carry is just over 300% of interest costs. Again, as of early May, this is the largest Dec-Jul spread I’ve seen since in the last two decades.

Carrying charges are very large this year, regardless of how you choose to measure them.


Responses

  1. What is your opinion of the negative carry with respect to /ZCZ1-/ZCU1. It is trading -0.24 as of this email. We run a small elevator and are have not ever experienced this negative carry.


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