Should You Store Grain or Sell Off the Combine?

Shift in Carry Means Shift in Strategy This Harvest

By Edward Usset

To fully understand your post-harvest challenge in pricing wheat this year demands more than the simple observation that prices are higher. It also demands an understanding of carrying charges in the market, and how remarkably different they are from the last three years.

Carrying charges are the price differences between futures prices in different delivery months. Table 1 compares prices and carrying charges from last year’s harvest to mid-July 2002. At first glance we see the sizable difference in prices – September wheat in mid July 2002 is trading 70 cents higher than the 2001 September contract during harvest last year. But the change in carrying charges has been just as remarkable. The carry in spring wheat futures from September to March was 28 cents last year, but a mere three cents this year.

Why the change? To answer this question, let’s look closer at what the carrying charge is, and what it can tell us about the market.

Using prices in 2001 as an example, many people believe that May wheat traded at a premium to September because the market expected prices to rise in the months ahead. But expectations did not create these price differences. The principle cause is storage costs—which essentially means the same as carrying charges. These carrying charges are determined by the market and reflect the underlying supply and demand for storage in the market.

Large carrying charges, like 2001, are common when free supplies (“free” as in freely available to the market, and not tied up in a government reserve) are large. The market was sending signals and incentives to market participants to store grain for later consumption. As of mid-July this year there is no carrying charge – the market is sending a completely different signal. The incentive to store grain is not there, and the market is asking participants to sell and ship grain now.

Now that you have a better sense of what a carrying charge is, it is interesting to note that from 1998-2001, large carrying charges had become the norm in grain markets. This was a result of the 1996 Farm Bill, which ushered in a new era in managing grain stocks. Starting in 1996, the government in large part stepped away from its long established role in the storage of corn and wheat, and instead let the free market determine how much is stored and where. With free stocks high and the demand for storage great from 1998-2001, the market reflected large carries.  However, poor growing conditions this year threaten to cut wheat production and stocks – and carrying charges have disappeared.

In the last few months, carrying charges disappeared in the corn market too, as they had in the soybean market a year ago. Shrinking carries in the bean market were the first sign that the supply/demand balance was shifting. Table 2 shows a history of carrying charges in corn, soybeans and spring wheat at or around harvest time since 1984. This approach to comparing carrying charges from one year to the next is somewhat simplistic (interest rates are a big factor and they were not always the same over this period), but I think it’s still useful to see the bigger picture.

Table2: Harvest-Time Carrying Charges in Corn, Soybeans and Spring Wheat, 1984-2002 (all figures in $/bushel)   Corn Soybeans Spring Wheat   Dec Futures Jul Futures Dec/ Jul Nov Futures July Futures Nov/ Jul Sept Futures Mar Futures   Year 15-Oct 15-Oct Carry 15-Oct 15-Oct Carry 15-Aug 15-Aug Carry 1984 2.81 2.93 0.12 6.33 6.74 0.42 3.84 4.01 0.17 1985 2.21 2.43 0.22 5.04 5.46 0.43 3.29 3.36 0.07 1986 1.63 1.84 0.21 4.73 4.99 0.27 2.64 2.77 0.14 1987 1.88 2.05 0.18 5.43 5.76 0.33 2.67 2.87 0.20 1988 2.94 2.97 0.03 8.04 8.22 0.18 4.16 4.27 0.11 1989 2.36 2.49 0.13 5.47 5.87 0.40 40.04 4.15 0.11 1990 2.28 2.47 0.19 6.14 6.06 0.46 2.83 3.04 0.21 1991 2.46 2.67 0.21 5.48 5.89 0.40 2.83 3.08 0.25 1992 2.10 2.29 0.19 5.35 5.64 0.29 2.99 3.16 0.16 1993 2.49 2.63 0.15 6.15 6.34 0.20 3.22 3.27 0.04 1994 2.18 2.41 0.23 5.39 5.74 0.35 3.56 3.63 0.07 1995 3.28 3.33 0.05 6.57 6.87 0.30 4.44 4.52 0.08 1996 2.87 3.01 0.14 6.93 6.86 (0.06) 4.62 4.64 0.02 1997 2.90 3.07 0.17 7.05 7.29 0.25 3.89 3.96 0.06 1998 2.27 2.50 0.23 5.56 5.90 0.34 3.32 3.43 0.11 1999 1.99 2.23 0.23 4.92 5.21 0.29 3.36 3.62 0.27 2000 2.07 2.32 0.25 4.65 5.01 0.36 2.90 3.21 0.31 2001 2.06 2.32 0.26 4.29 4.46 0.17 3.05 3.34 0.28 2002* 2.42 2.53 0.11 5.31 5.26 (0.05) 3.76 3.78 0.03 Ave. 2.38 2.55 0.18 5.75 6.05 0.30 3.42 3.57 0.15 *  2002 figures as of July 17, 2002.

If it holds steady until harvest, the current 11-cent carry from December to July in corn would be the smallest since 1995, and the third smallest since 1984. The bean market is currently inverted from November to July, for only the second time since 1984.  In an inverted market, nearby futures contracts sell at a premium to distant futures contracts. Hence, the carrying costs are not reflected in prices. The three-cent carry from September to March in spring wheat is a sharp contrast to the last three years, and the second smallest in this table.

What does a disappearing carry mean to you and your post-harvest marketing strategy? Over the past few years I have consistently advised producers to consider the strategy that best fits the current market condition. From 1999 to 2001, the spring wheat market offered large carrying charges and great opportunities to store grain and sell the carry at harvest, using a forward contract or hedge-to-arrive contract for spring delivery, or the direct sale of March or May futures. With no incentive in the market to store grain this year, I suggest that producers seriously consider selling wheat at harvest or, at most, store wheat to October or early November to avoid the traditionally low harvest basis. Then, let the bins go empty.

I can hear your groan. “Let the bins go empty! What about the market upside?” I like to think that the crop you intend to plant next year is your upside.  In fact, I already have a 2003 pre-harvest marketing plan in place to take advantage of the recent market run-up (see Usset’s 2003 plan, click here). But if that’s not enough, then consider a paper farming strategy of buying call options after your wheat is sold. Over the past few years I’ve railed against this strategy because it makes no sense in a market with large carrying charges. But paper farming has some appeal when carrying charges are flat or inverted.

You should also consider not buying calls, and saving the 10-20 cents per bushel you are sure to spend in seeking the upside. The final choice rests on the cost of call options (and they can get pricey!) along with your appetite for risk. But holding wheat in the bin until next spring is not what the market, and carrying charges, is inviting you to do.

Edward Usset serves as a grain marketing specialist for the Center for Farm Financial Management, the developers of Finpack and Marketeer software. He also teaches “Grain Marketing Economics” and “Futures and Options Markets” at the University of Minnesota. Since 1999, Usset has led the Minnesota Master Marketer Program, which features short and long training sessions on marketing. He has a website on grain marketing at www.apec.umn.edu/faculty/eusset. Prior to his work with the U of M, he worked in the grain industry where grain futures and options were a daily part of his responsibilities. You can contact him directly at usset001@umn.edu .