Posted by: usset001 | July 16, 2009

Dec’09/Jul’10 corn spreads

decjulycornWe should not be surprised to learn that carrying charges in the corn market are widening as prices trend lower. On the first day of June, Dec’09 corn futures closed at $4.69 and the carry from Dec’09 to Jul’10 was just 23 cents. Today, Dec’09 futures are closer to $3.30 (did we lose 30% of the corn value in six weeks?) and the spread has widened to 32 cents. Positive carrying charges, aka a market in contango, are a signal to market participants that nearby supplies are ample (and prices low) and you best hold extra stocks off the market for some later date (where prices are higher).

Can we assess how large is “large” in the world of positive carrying charges? I would recommend a simple three-step process to measure the size of a carry.

Step 1: calculate the carrying charge per month: If the Dec’09/Jul’10 carry is 32 cents, then the carrying charge per month is 32 cents/7 months = 4.57 cents per month

Step 2: calculate a monthly per bushel interest cost for grain storage: With Dec’09 futures close to $3.30 per bushel, the cash price of corn at harvest will be close to $2.85 in southern MN. With the prime rate is 3.25%, the annual cost of financing corn in storage (at 1% over prime) is $2.85/bu. * 4.25% = $0.12 per year or 1 cent per month.

Step 3: compare the size of the carry to your interest costs: 4.57 cents per month / 1 cent per month interest = 457%

Allow me the opportunity to translate this answer into english; the current corn carry of 32 cents from Dec’09 to Jul’10 is more than four times larger than the interest costs you will incur by holding corn in storage.

I have history going back to 1990, measuring the size of the carry from December to July at harvest time. The current measure – 457% – is almost the largest on record. I have 3 other years when the Dec/Jul carry exceeded 400% (2001, 2004, 2005).

Harvest is a long ways off, but the market is sending early signals to get ready to store corn at harvest.


Responses

  1. So, you are suggesting aull spread? How far do you expect this to widen out to? 40/50 cents?

    • No, I don’t expect the spread to get that wide. My sense is that it is approaching a full carry and will get no wider than about 35 cents.


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