Blogging by the Bushel
With numerous challenges over the past several years for producers, we at Mercer Landmark understand the need for a comprehensive risk management solution. We seek to provide our customers with unparalleled service to ensure maximum results.

by Greg Johnson, Executive Account Representative, Champaign, IL

With the 5-year commodity super-cycle apparently over, producers will need to adjust their marketing plans in the following ways:

  1. Know your cost of production.
  2. Be realistic. The sooner you adjust to the lower price levels, the better.
  3. Be pro-active. In the past, the market has given us multiple opportunities to lock in profits. Those opportunities may become fewer and farther between now. Have a plan in place, which includes open offers, flat price contracts, min/max/averaging contracts, and hedge-to-arrive (HTA) contracts.
  4. Focus on the basics. One such basic, which will be discussed below, is capturing the carry.

EXAMPLE OF CAPTURING THE CARRY
A producer that would like to get $4.00 for corn that will be put into the bin this fall can achieve this goal, even if the cash price never gets to $4.00. Let’s assume a farmer sells December 2015 futures at $3.95 (which we had several chances to do last month). He then puts an offer in to “capture the carry” between December futures and March futures when the spread gets to 14 cents. He now has a $4.09 March hedge. If the basis is attractive for Jan/Feb/March delivery, he can lock in the basis, or he can roll the $4.09 March hedge to a $4.16 May hedge or a $4.23 July hedge. Thus, the producer can now deliver corn for over $4.00 cash, even if the price never gets to $4.00 next spring.

Look at the table below, showing the December 2015/ March 2016 corn spread

Takeaways from this table:

  1. The December/March corn spread has traded 13 cents (or wider) each of the past 5 years.
  2. In short crop years, the spread tends to narrow in throughout the year.
  3. In big crop years, the spread tends to widen out throughout the year.

With a comfortable 2014 corn carry-out and an adequate 2015 corn acreage number, the odds are good that the 2015 December/2016 March corn spread will continue the streak of trading at least out to 13 cents sometime this year. Assuming a normal yield this year, the spread should also continue to widen out throughout the course of the year.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

* Copy this password:

* Type or paste password here:

38,020 Spam Comments Blocked so far by Spam Free Wordpress

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>