Consider Use of a Basis Contract to Market Corn

Steven D. Johnson, Ph.D., Farm Management Specialist, Iowa State University Extension and Outreach, shared marketing tools and tips for the 2016 crop.

Johnson_Steve_smKeep an eye on your local basis to see if you should continue to store or price some of your corn. Farmers who have unpriced corn might consider using a basis contract to market at least a portion of those bushels. An attractive basis in late December and the need for cash will be the main drivers for farmers to move some of those stored bushels. Most of the cash price movement in late fall and early winter months typically comes from better basis being offered as farmers slow grain movement. In addition, two 3-day weekends in late December increase the odds of potential “quick ship” bids to meet processor demands for additional bushels.

Seasonal futures price trends indicate corn futures prices don’t typically rally in the fall and winter months. That’s because most everything is known about the Northern Hemisphere feed grain crops by then, and that’s where nearly 85% of the world production takes place. However, most farmers will be reluctant to give up ownership of bushels at sub-$3.50 per bushel cash corn prices.

Farmers need to pay attention to the costs of ownership

Chart of storage costs, on farm vs. commerical
Cost of 2016 Corn Ownership

Compare the cost of storing corn at a commercial elevator to your own on-farm storage costs. The ISU Extension and Outreach Iowa Commodity Challenge website can show you how. It uses the following 2016 crop assumptions: cash corn is valued at $3.11 per bushel at a central Iowa elevator when about 50% of the Iowa harvest was complete. Interest is accruing on stored grain at a rate of 5% or 1.75% if the USDA marketing loan is used. On-farm storage is 1 cent per bushel per month while commercial storage is 16 cents for the first 90 days and 2.8 cents per bushel for each month thereafter. Note the cash prices (dotted line) are below the typical cost of corn ownership as of late November.

Cost of 2016 Corn Ownership

Once you store corn, imagine how much cash prices will need to improve each month to justify storage. Commercial storage could easily be 3 to 4 times more expensive per bushel than on-farm storage costs. The cash price received for commercially stored bushels will also reflect the basis offered at that commercial storage facility. If history is any indication, the likelihood of selling those cash corn bushels above the cost of storage probably means a significant futures price rally is needed (more likely in the spring months)and improvement in the basis.

How does a basis contract actually work?

Most grain merchandisers offer a marketing tool called a basis contract. A farmer delivers cash corn and eliminates storage costs and basis risks. The merchandiser buys a corn futures contract (goes long) in a deferred month on behalf of the farmer. The merchandiser will likely charge a small service fee of 1 to 2 cents per bushel subtracted when the basis contract is settled, likely in the spring.

Upon delivery of the cash bushels, a farmer can collect 70% to 80% of the corn’s value. The merchandiser holds the remaining 20% to 30% balance of the cash value to make potential margin calls should futures prices decline. Any excess funds minus the 1- to 2-cent service fee are returned to the farmer upon settling the basis contract.

Eliminating storage costs and basis risk

The farmer needs to convey to the merchandiser a date and price at which the farmer wishes to have this long futures position lifted. Consider being “long” the May 2017 or July 2017 corn futures contracts when using a basis contract to increase the chance of benefiting from a spring futures price rally.

Discuss risks and rewards with your merchandiser when you’re initiating cash sales and basis contracts. Be sure you understand the risk of being “long” futures and the flow of cash funds involved in the transaction. The farmer isn’t able to take advantage of the carry offered in the futures markets with a basis contract. However, there are several advantages a basis contract provides. Those include providing cash to help pay expenses and meet your farm operation’s cash flow needs, elimination of storage costs and basis risk, and minimizing the concern for on-farm stored corn quality.

Take the Iowa Commodity Challenge and learn new marketing skills

The website featuring the Iowa Commodity Challenge has related crop marketing information including 14 videos and a 65-page Marketing Tools Workbook.

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Supply and Demand Move Higher (7/12/16)

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest USDA reports.

Hart_Chad-thumbThe July updates from USDA pushed both crop supplies and demands higher. But in the longer run, stock levels are projected to be higher, with steady to lower prices. On the supply side, the revised acreage and stock numbers from last month were fully incorporated into the projections. Corn production was increased by 110 million bushels, while soybean production rose by 80 million.

On the demand side, there were several offsetting moves. For corn in both old and new crop settings, feed and ethanol usage were lowered, while food and export usage rose. For soybeans, export demand was increased for both old and new crop. Crush demand was lifted slightly for the new crop, but seed and other uses were lowered for the old crop. Putting all of the shifts together results in slightly lower old crop ending stocks, but higher new crop (2016/17) stocks.

Season-average prices were held steady for soybeans, at $9.05 for the 2015/16 crop and $9.50 for the 2016/17 crop. Corn season-average prices were reduced by 5 cents on the 2015/16 crop to $3.65 per bushel and by 10 cents on the 2016/17 crop to $3.40 per bushel.

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Positive Demand News from USDA (6/10/16)

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest USDA reports.

Hart_Chad-thumbUSDA’s June updates contained good news on the demand front for corn and soybeans. International demand continues to strengthen, while domestic usage holds steady. With no major changes on the supply side, this implies lower ending stocks and projections of higher prices. Starting with corn, the losses and delays in the South American harvest have opened up some off-season selling opportunities for the U.S. Old crop (2015/16) exports were raised 100 million bushels as a result. Although corn imports were increased slightly, the overall impact for old crop corn is a 95 million drop in ending stocks and a 10 cent increase in the season-average price to $3.70 per bushel. That drop in ending stocks, combined with another increase in new crop (2016/17) exports of 50 million bushels, lowered new crop ending stocks by 145 million bushels. The changes added 15 cents to the new crop corn season-average price estimate, raising it to $3.50 per bushel.

For soybeans, both old crop domestic and international demand were on the upswing. Crush added 10 million bushels, while exports grew by 20 million bushels. With the 30 million bushel drop in old crop ending stocks, USDA raised its 2015/16 season-average price by 20 cents to $9.05 per bushel. As with corn, the export demand increase extended into the new crop as well, adding another 15 million bushels. That pushed new crop ending stocks below 300 million bushels and lifted the 2016/17 season-average price estimate by 40 cents, to $9.50 per bushel.

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How accurate and useful is the ISU Cash Rent Survey?

Alejandro Plastina, extension economist, explores results of a follow-up survey on the accuracy and usefulness of the ISU Cash Rental Rate Survey.

plastina_alejandro_photoCash rents, land values, and rates for custom work in Iowa are topics that usually attract lots of attention from a number of stakeholders in the agricultural sector. Even more so when the economic outlook for the sector is particularly promising or particularly discouraging. So it comes as no surprise that the Cash Rental Rates for Iowa Survey is received with different degrees of acceptance by different groups depending on the economic outlook. This year we requested feedback from the online respondents to the Cash Rent Survey about the accuracy and usefulness of the survey results.

Who responded?

The Cash Rental Rates for Iowa 2016 Survey had 1,585 responses, of which 320 responses were submitted through the online questionnaire (the rest were mailed using USPS). All online respondents were invited to participate in a short follow up survey about their perceptions of the Cash Rent Survey. One hundred and forty-five respondents completed the follow up survey. All of them reported being familiar with the survey (figure 1).

Comparing the participation of different categories of participants in this opinion poll versus the corresponding participation of the same categories in the Cash Rent Survey (figure 2), farm operators accounted for the same share (47%); but agricultural lenders, professional farm managers and Realtors had a greater share (21% vs. 14%, and 16% vs. 12%, respectively); while landowners had a smaller share (15% vs. 25%).

Figure 1. How familiar are you with the ISU Cash Rental Rates for Iowa Survey?Figure 2. How would you classify yourself?

How accurate are survey results?

Ninety-one percent of the respondents indicated that the Cash Rent Survey reflects typical cash rents by county moderately, very, or extremely accurately (figure 3). Forty-seven percent of the respondents indicated that the Cash Rent Survey reflects typical cash rents by county very or extremely accurately.

The most prevalent response among farm operators, landowners, and agricultural lenders was that the Cash Rent Survey reflects typical cash rents by county very accurately, followed closely by moderately accurately (figure 4). The most prevalent response among professional farm managers and Realtors was that the Cash Rent Survey reflects typical cash rents by county moderately accurately.

Figure 3. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect typical cash rents by county?Figure 4. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect typical cash rents by county, by type of respondent?

The accuracy of the Cash Rent Survey in reflecting annual changes in typical cash rents by county was perceived to be better than the accuracy in reflecting their levels. Ninety-six percent of the respondent indicated that the Cash Rent Survey reflects year-over-year changes in typical cash rents by county moderately, very, or extremely accurately (figure 5). Fifty-seven percent indicated that the Cash Rent Survey reflects year-over-year changes in typical cash rents by county very or extremely accurately.

The most prevalent response among farm operators, landowners, and agricultural lenders was that the Cash Rent Survey reflects typical cash rents by county very accurately, followed by moderately accurately (figure 6). The most prevalent response among professional farm managers and Realtors was that the Cash Rent Survey reflects typical cash rents by county moderately accurately, followed by very accurately as a close second.

Figure 5. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect year-over-year changes in typical cash rents by county?Figure 6. How accurately does the ISU Cash Rental Rates for Iowa Survey reflect year-over-year changes in typical cash rents by county, by type of respondent?

How useful are survey results?

Ninety-seven percent of the respondents indicated that the Cash Rent Survey was at least moderately useful to them (figure 7). Seventy-six percent of the respondents indicated that the Cash Rent Survey was very or extremely useful to them.

The most frequent answer among farm operators and agricultural lenders was that the Cash Rent Survey was extremely useful, followed by very useful and in a distant third place moderately useful (figure 8).

The most frequent answer among landowners was that the Cash Rent Survey was very useful, followed by extremely and moderately useful.

Professional managers and Realtors indicated most frequently that the Cash Rent Survey was moderately useful, followed by very and extremely useful.

Figure 7. How useful is the ISU Cash Rental Rates for Iowa Survey to you? Figure 8. How useful is the ISU Cash Rental Rates for Iowa Survey to you, by type of respondent?

Summary  

Although this opinion poll about the usefulness and accuracy of the Cash Rental Rates for Iowa Survey was not designed to be representative of all stakeholders in Iowa, it shows that most farmers, landowners, agricultural lenders, professional farm managers and Realtors, and other agricultural professionals that participate in the survey find it useful and accurate.

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April Demand Update (4/12/16)

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest USDA reports.

Hart_Chad-thumbThe World Ag Supply and Demand Estimates update for April contained some modest changes for the crop balance sheets. For U.S. soybeans, the only changes were a 15 million bushel bump in export demand and a slight decline in seed demand, based on last month’s Prospective Plantings report. Projected soybean ending stocks were lowered to 445 million bushels, but the midpoint of the 2015/16 season-average price range remains steady at $8.75 per bushel. For U.S. corn, the adjustments were mixed. Feed demand was reduced 50 million bushels, based on the quarterly disappearance pattern from the Grain Stocks report. Corn usage for ethanol was increased 25 million bushels as ethanol production has held near record levels over the 1st three months of the calendar year. Thus, corn ending stocks were raised 25 million bushels and the midpoint of the 2015/16 season-average price range fell 5 cents to $3.55 per bushel.

World corn production for 2015/16 was increased by 3 million metric tons, with 1 million of that going to increased imports for Mexico and Southeast Asia and 2 million projected to be held in stock. China’s feed usage of corn is projected to rise by 2 million metric tons, but that increase is expected to be met by drawing down existing internal stocks. World soybean production for 2015/16 was lowered slightly as declines in Chinese and Indian production offset an increase from Argentina. Global soybean trade was raised, based on stronger exports to China, Japan, and Mexico.

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Questions about Late Harvest, Low Prices Addressed by Iowa State

A news release from Iowa State University Extension and Outreach by Charles Hurburgh, Agricultural and Biosystems Engineeringtatry@iastate.edu and Willy Klein, ISU Extension and Outreachwklein@iastate.edu

Members of the extension crops team from Iowa State University responded to producer questions related to the late spring, dry summer and slow crop development by holding meetings in north central Iowa last week.

Extension field agronomists Mark Johnson and Paul Kassel discussed crop maturity, crop drying, potential effects of an early frost, and pre-harvest preparations at meetings held in Clarion, Wesley and Sheffield. Charles Hurburgh, extension grain quality and handling specialist, spoke of 2013 crop quality, including moisture and test weight variability, potential diseases, and the best practices for handling and storing the crop.Iowa State specialists Chad Hart, extension economist, and Kelvin Leibold, extension farm management specialist, reviewed the 2013-2014 crop market outlook at the meetings.For the benefit of those not attending the meetings, ISU Extension and Outreach has made video recordings of the presentations available on the Iowa Grain Quality Initiative website at http://www.extension.iastate.edu/grain/.

Get more crop news from ISU Extension and Outreach
The extension crops team makes the most current information related to crop, harvest, storage and handling issues available through the Iowa Grain Quality website and Integrated Crop Management (ICM) News, an online newsletter. ICM News articles are published at www.extension.iastate.edu/cropnews/; newsletter subscribers receive notification when new articles are published.Hart and Leibold are frequent Ag Decision Maker authors. Ag Decision Maker (AgDM) updates and news are available atwww.extension.iastate.edu/agdm. The AgDM newsletter and updates are published every month; subscribers receive notification of the publication of new materials.As the drought situation continues in Iowa, new material is added to the Dealing with Drought – 2013 webpage. The webpage offers information for dealing with crops, livestock, stress, home and yard and financial concerns during drought situations at www.extension.iastate.edu/topic/recovering-disasters.

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Harvesting Wet Corn to Provide Challenges

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu.

Johnson_Steve_smWhile half of Iowa’s corn crop was planted by mid-May, much was pushed back several weeks. Some fields were replanted more than once and as a result pollinated into August.

The bottom line for many growers is that corn maturity has been delayed. The problem with harvest may be a wetter than normal crop created by a combination of late planting and then impacted by hot, dry conditions during grain fill.

Iowa farmers are now expected to harvest about 13.5 million acres of corn, that’s 200,000 acres less than last year’s drought ravaged crop. The latest USDA estimate is that Iowa would average 162 bushel per acre, below the 30-year state trend yield by 17 bushels. The variability of corn yields and moisture levels is going to be large across the state. Much depends on the corn planting date and the water holding capacity of the soils.

Some corn plants that died prematurely may already be harvested, but much of Iowa’s crop will be slow to dry down in the field. It will need to be harvested and dried down to near 14 or 15 percent moisture to avoid a discount or extend storage time for bushels to be marketed later. Delivery of wet corn sold will carry moisture discount at roughly 2 percent times the points of moisture above 15 percent times the cash contract price.

For corn harvested at 25 percent moisture and averaging 170 bushels per acre dry, that’s about $90 per acre with corn valued at $4.50 per bushel. This amount roughly equals the cost of commercial drying charges using a 1.4 percent shrink factor and 4.75 cents per point of moisture. Drying and storage of corn may be a problem as harvest gets underway.

Heavy drying needs
The key thing for a grower is to think ahead about corn moisture levels, drying and storage costs — be prepared. There’s an abundant supply of propane out there. The challenge this fall — if harvested grain needs a lot of drying — will be having the propane in the right place at the right time.

Perhaps the most important factor in dealing with corn at higher moisture levels at harvest is getting the combine set up right. Some things to remember are:

  • A properly adjusted combine can handle corn between 20 and 30 percent moisture, but expect grain damage to increase unless careful attention is paid to combine settings.
  • Be sure to select a ground speed adequate to keep separator and cleaning shoe at full speed. Adjust your hydrostatic transmission to maintain the engine near rated speed under varying crop conditions.
  • Operate the corn head as high as possible to reduce getting wet plant material in the combine, which can significantly reduce the machine’s ability to thresh and separate the grain.
  • Before changing concave clearance, make sure it is level side-to-side in a conventional combine or front-to-back in a rotary combine so that the adjustment is uniform.

While corn harvest may begin later than normal this fall, farmers will want to be prepared early.

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Some Crops Grow Without Rain (9/12/13)

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest USDA report.

97hartsmThe latest USDA updates showed a growing corn crop and a shrinking soybean crop. The projections for corn put the nationwide average yield at 155.3 bushels per acre, up 0.9 bushels from last month and over 30 bushels better than last year. That puts corn production at 13.84 billion bushels, a record by over 700 million bushels. Soybean projections are a nationwide yield of 41.2 bushels per acre and production in the 3.15 billion bushel range. That soybean yield is down 1.4 bushels from last month, but still 1.6 bushels better than last year.

On the demand side, the changes were concentrated. For corn, all of the shifts were on the old crop with feed, ethanol, and export demand being raised. New crop corn demand was left unchanged. For soybeans, the major demand shifts were for the new crop as domestic crush and export demand were both lowered as we enter the marketing year. In the end, corn’s supply gains outweighed the demand shifts, so 2013/14 projected ending stocks are up slightly compared to last month’s projections, to 1.855 billion bushels. With that slight increase, USDA lowered the midpoint of its season-average price range to $4.80 per bushel. For soybeans, the supply moves also outweighed the demand shifts, but the moves were in the opposite direction from corn. So 2013/14 ending stocks tightened back to 150 million bushels and the midpoint of the season-average price range jumped $1.15 to $12.50 per bushel.

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Early Harvest Basis Opportunities

Contributed by Steve Johnson, Extension Farm Management Field Specialist,sdjohns@iastate.edu.

Johnson_Steve_smWith the heat and dry conditions from late August, Iowa corn fields are maturing quickly. Farmers might want to take advantage of an unusual marketing opportunity this in September.

By harvesting some of their corn early and delivering directly in to local corn users, such as processors, livestock feeders and ethanol plants; farmers could potentially earn a premium of 50 cents per bushel of more over cash prices offered in October. That premium price is likely to disappear quickly in early October, when the 2013 fall harvest begins to pick up more momentum.

It’s really going to be a win-win situation for grain users and farmers. Corn users are looking for corn now after last year’s short crop and farmers could use this to earn premium prices and help their fall cash flow situation.

There could also be a few marketing opportunities on early-harvested soybeans. Like corn, processors and river terminals are looking to secure a local supply of soybeans after last year’s drought-reduced harvest.

Iowa farmers are fortunate because there is a strong demand for corn and soybeans in the state. That can create marketing opportunities that are not  available in all states.

A good strategy for Iowa farmers this month is to keep a very close eye on the moisture content and quality of corn in their fields during September as well as bids from local buyers. If the moisture content of the corn drops down toward 15 percent, or if there are signs of stalk rot or other problems that could trim yields, it may make sense to harvest some of the driest fields early and try to take advantage of a cash bid premium, he said. Even if the grain is still above the target moisture level of 15 percent, the premium for early delivery may more than make up for the dockage.

In years when the crop is less than ideal, there is a tendency for Iowa farmers to store corn and wait for higher bids later in the marketing year. However, those higher bids may not materialize in the upcoming marketing year because other parts of the Corn Belt have experienced better growing weather and may have more corn to market. I think it will be good to take an aggressive marketing approach this year and to look for early opportunities.

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Iowa’s early planting dates: April 11 for corn, April 21 for soybeans

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu.

Early planting dates in Iowa are April 11 for corn and April 21 for soybeans. Acres planted before these dates are no longer eligible for replant coverage payments should it be necessary to replant. The maximum replant payments each year are equal to 8 bushels of corn and 3 bushels of soybeans. Multiply these bushels times the RMA projected price for that year, which is the February average futures price for December corn and November soybeans used to establish the value of the insurance guarantees that the producer purchases. For 2013 the projected prices are $5.65 per bushel for corn and $12.87 for soybeans, so the maximum replant payments are $45.20 or $38.61 per acre, respectively.

Any acres planted before the early planting dates lose replant coverage, even if the entire farm or insurance unit hasn’t been planted. However, early planting doesn’t affect a farm’s actual production history (APH) yield or revenue insurance guarantee, as long as all other good management practices are followed throughout the growing season. Once the crop is planted, that revenue guarantee is still in effect, and any indemnity payments will depend on the final harvested yield and the harvest price.

More information on important crop insurance dates can be found on the Ag Decision Maker website.

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