Posted by: usset001 | November 10, 2009

Corn carrying charges at harvest

czcn spread

Dec'09 - Jul'10 carrying charges

Corn harvest is in full swing in Southern Minnesota and producers are facing the ultimate in post-harvest marketing question; to store or not to store? I received this from a farmer earielr this week…

 I have a question on market carry and storage risk. I have my unsold 2009 corn bushels covered with December puts at a very healthy profit. There is about a 28 cent carry to next July [it’s actually over 32 cents per bushel]. It seems that in the past you’ve said a 25 cent carry [from December to July] is good. I’m unsure if this 28 cents is worth the risk with the poor quality of the corn crop this year. What are your thoughts on this?

In response to higher grain prices two years ago, I changed the way I measure and define “large” or “small” carrying charges.  My new way of measuring carrying charges is a three-step process.  Let’s assess the current carrying charges in the corn market, using closing prices for Dec’09 and Jul’10 corn futures from November 10, 2009.

 Step 1: calculate the carrying charge    $4.26¼ (Jul’10) – $3.93¾ (Dec’09) = 32½ cents per bushel

 Step 2: calculate a per bushel interest cost for grain storage     $3.54 (cash grain price) * 4.25% (prime plus 1% interest rate) * 7 months (Dec- July) / 12 months per year = 8¾ cents

 Step 3: compare the size of the carry (Step 1) to interest costs (Step 2)  32.5 cents carry / 8.75 cents interest cost = 370%

Let me restate the results in English: The current carrying charge of 32½ cents from December to July will cover interest costs of holding grain in storage nearly four times over.  According to my records, the current corn carry of 370% of interest costs at harvest time is the fourth largest since 1990 (2001, 2004, and 2005 were slightly larger).  My definition of a “large” carry is, carrying charge / interest cost > 140%, and clearly we exceed this figure.

I like to sell a large carry against grain held in storage.  If you don’t like using futures directly, enter into an HTA contract using the July futures base of $4.26 per bushel.  Assuming a spring/early summer basis of 40 cents under July (it could be better), you will end up with a cash price of about $3.86 per bushel, more than 30 cents more than the harvest price and more than enough to cover your variable costs of storage on-farm.  Selling the carry also hedges you against lower prices and allows you to defer income to next year.  The downside of selling the carry is the, uh, upside in the market – you have none.  If prices rise $1 in the months ahead (not my prediction, but I’ve been wrong before), you will end up with a price of about $3.86 for your corn.

 


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