Posted by: usset001 | May 28, 2010

Should I place my new crop corn hedges in the December or July contracts?

Spreads continue to be the topic of conversation in the grain markets.

“The futures market is bidding a 29 cent carry from Dec’10 to Jul’11 in the corn market. Should I place my new crop hedges in the Dec’10 or Jul’11 contracts? I am tempted to go for the July contract.”

From your question, I can see that you have on-farm storage and can make a choice between delivery or storage at harvest.

Below is the history of the Dec-July spread since 1983, on May 1. At last night’s close of 29 cents, that is the largest carry to July relative to interest rates.

One of the strongest (scratch that – THE strongest) seasonal trends is the tendency for the Dec-July (red July, or one year out) spread to widen from spring to harvest. But I say to heck with the seasonal and hedge directly into the July’11 contract because…

  1. The spread is already exceedingly wide for this time of year (see table).
  2. There are goofy things occurring in the Chicago wheat market (extremely wide carrying charges) and this goofiness has spilled into related markets like corn, Kansas City and Minneapolis wheat. This, I think, explains #1 – the spread is exceedingly wide for spring.
  3. We can point to 36 and 40 cent Dec-July carrying charges at harvest in 2007 and 2008, but these were a result of much higher interest rates (8% prime in 2007) and higher prices ($6.30 in 2008)

Git-r-done. Your risk is two-part; a quick jump in interest rates (highly unlikely) or a sharp rally in corn prices (unlikely and, if it happened, this is just as likely to narrow spreads). The more likely scenario is that interest rates remain low and December futures trade lower into harvest ($3.50?). If this occurs, then the Dec-July spread may actually narrow (25-26 cents?) due to the lower cost of carrying cheaper corn.

Concerning no-brainer opportunities like this, my old friend Vic would say that when the cookie jar is unexpectedly placed under your nose, you have two possible responses; (1) stop and ask “Why is this cookie jar under my nose?” or, (2) grab cookies. I say grab cookies.

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