Betsy’s Bulls and Bears

Keep An Eye on Carry in 2005 Grain Futures

By Betsy Jensen
NCTC Instructor

Looking at the markets often has farmers seeing red. That can be taken several different ways.  Perhaps we sold too early, and are seeing red because our neighbors are selling beans for $3 more than us. Or we’ll joke that we’ll see red if prices and yield aren’t as favorable as we’d like. Actually, there is a legitimate way to see red in a positive way in the markets, but it requires you to plan far ahead.

Some commodity marketing aficionados use the term “red” to refer to an entire year out on the marketing calendar. For example, the 2004 November soybean contract is just new crop beans, but the 2005 November soybean contract is called Red November.  It means you’re planning at least a year in advance. With prices at a high level, maybe it’s a good time for farmers to begin “seeing red,” or planning advance sales into 2005.

Selling Red was an easy decision to make back when we had a carrying charge (see explanation elsewhere on this page). You could make a great sale in wheat and corn by just planning ahead and selling the carrying charge.  If we had a carrying charge today, it means we could sell Sept 2005 wheat for $.35 more than Sept 2004 wheat.  It was an easy decision to make. 

Think back to the days when wheat was hovering around $3.25 futures. If you planned ahead and sold the carrying charge, you were able to get $3.80 futures, and many farmers in the marketing groups I work with did just that. By planning ahead (“Selling Red”) we were able to make $.55 more than the cash price.  We don’t have a carrying charge today so making an early sales decision is a little more difficult.

Even though we don’t have a carrying charge, we do have very good prices available to us. I’m still able to get the $3.80 wheat futures I wanted so badly just a few years ago, but it doesn’t look as impressive when the nearby contract is just as high. The carrying charge made selling red an open and shut case, but without the carry in the market, we need to examine the sales a little more closely.

I’ve always emphasized to marketing group members that there is always something to sell. Rallying prices are never the enemy, despite how empty your bins might be.  As long as you’re farming another year, there’s another crop to sell. 

With that in mind, start paying attention to the 2005 wheat, soybean and corn contracts.  Prices might not be that impressive when compared to the 2004 contracts, especially for soybeans, but that shouldn’t be the yardstick that we measure prices against.  We need to look at the 2005 contracts to determine if we can meet our cost of production with those prices.

It’s not going to be a perfect plan because no elevator is going to offer you a decent basis for 2005 delivery.  You have to look at the futures price, subtract a reasonable basis, and then determine if the price is an acceptable starting point.  You’re also not going to know about protein discounts in wheat, but that isn’t something we can control anyway. We may have $3 futures with large discounts just as easily as we have $5 futures and large discounts.

Rallying prices always present us with sales opportunities, but sometimes we have to look a little harder to find them. I’m not advocating selling half of your 2005 production on June 1, 2004, but if prices are acceptable, dip your toe in the water and make a small sale. Many things can change in the 18 months until harvest, for good or bad.  You may have a sizable LDP to add onto the sale, or you may be selling the rest of your wheat for $5.  Either way, you come out ahead.   

More on “The Carry”
The carrying charge (often referred to simply as “the carry”) is what the market is willing to pay you to store your grain.  If December futures are higher than July, then the market is telling you to keep the crop in your bin, and you’ll be paid the carrying charge.  If December futures are lower than July (the soybean market this spring for example), then the market is telling you to sell the grain today because it’s not going to pay storage. It wants the crop today, and not in six months.

The carry can offer producers an opportunity to lock in a higher price for a distant month using price strategies such as put options.  The carry can also amplify a seasonal price change in the futures price.  For example, if December wheat is already 25 cents higher than July wheat, the likely price drop in wheat becomes 40 cents when combined with the 15-cent seasonal decline.  

Jensen farms with her husband Brian near Stephen, Minn.  Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council. If you have a question or topic related to marketing that you’d like to see addressed in this feature, call 1-800-242-6118, or email Jensen: betsy.jensen@northlandcollege.edu