Farmers Hold Corn Tight

Farmers Use On-Farm Storage as Leverage for Better Prices

The DTN Market Tracker, available on DTN subscription products, shows cash corn basis levels by county. Counties shaded red, orange or yellow currently have a cash basis that's below futures prices, while cash prices in green and blue counties are above futures. (DTN chart)

OMAHA (DTN) -- This year’s bumper corn crop is mostly in the bin, and it’s going to stay there until cash prices improve.

Very little of this year’s corn crop has been priced, a recent DTN 360 Poll showed. Of 429 responses to the online survey, 44% of farmers said they’ve sold or forward priced less than 10% of their crop.

“It’s all about price,” DTN analyst Todd Hultman said. “It’s not a profitable opportunity for most. And for that reason, they’re in no hurry to sell.”

The poll showed that 17% of farmers have sold up to 25% of their corn crop, while another 20% have sold between 26% and 50% of their harvest.

Slow farmer sales have made appearances in the quarterly statements from several large grain companies in the past few weeks, prompting headlines about “miserly” farmers hoarding their crops. Bunge and ADM both mentioned lower than average harvest time sales as a reason for lower grain trading profits.

Farmers have built more than 2 billion bushels of on-farm storage in the past decade, and it’s given them more control over the flow of grain.

“For commercials, that’s probably a little tough to get used to,” Hultman said. “It’s really putting them in a spot where they’re going to have to pay up if they want the grain. It allows producers to be that much more stubborn and to have that much more control about prices.”

Matt Bennett, an Illinois farmer and marketing consultant, said it seems like there’s “an unprecedented amount of ownership” of corn on the farm or in commercial storage this year.

“A lot of these guys are doing everything they can to keep things together,” Bennett told DTN. “We’ve had our profitability go from historical levels to negligible levels. Sometimes a guy has to hold his grain in order to keep his farm intact. Yes, they’re tight-fisted and waiting for a rally, but they also need to be cautious.” There are also a few options strategies that farmers might consider.

As of Wednesday, the DTN Cash Corn Index was $3.55 per bushel with a national average basis of 25 cents under futures. But the regional differences are stark.

Currently, parts of Ohio, Indiana and Illinois have a positive corn basis right now, which Bennett said reflects tighter supplies due lower production following this spring’s excessive rain. It also reflects tighter 2014-15 carryover stocks in the Eastern Corn Belt region compared to the Western Corn Belt.

With cash prices near the $4 mark in some of those areas, farmers who can make money at that price should be looking closely at sales, he said.

Hultman agrees. “I’d expect they’d be more willing to give up their grain and take advantage of prices now, because the more you allow time to work, the more uncertainty comes into the market.”

Bennett added it’s still tough for a farmer who had a poor yield in Indiana or Ohio to sell corn, even at prices near $4, because his breakeven costs are spread across fewer bushels.

“But that doesn’t mean the market is going to go up,” Bennett said. And there are two big variables that could quickly change the cash price situation: the arbitrage opportunity between the Eastern and Western Corn Belt, and farmers that need to sell grain to cover their cash needs.

Ground piles of corn dot the countryside in the Western Corn Belt, and Bennett said Iowa farmers that pulled in 220 bushels per acre would love to get $4 for their cash corn. Current basis levels in the Western Corn Belt are running 20 to 70 cents below futures prices, depending on location.

“In Iowa, South Dakota, Minnesota, there’s a lot of corn sitting around. It’s going to make its way into Illinois, and when that happens, basis is likely to fall apart,” Bennett said. “Eventually the market is going to find a way to even out those basis levels.”

For farmers in the Western Corn Belt, where yields have been fantastic and cash prices aren’t nearly as good, much of farmers’ marketing strategies will come down to their financial position, Hultman said.

“Do they have the cash reserves to allow themselves to be patient here? And if they do, I think most guys would be better off shooting for a sale sometime from January to late March.”

Some farmers will be forced to sell grain to cover their costs, and that could cause some weaker cash prices, Bennett said. “I’m still kind of friendly to the corn market long term. There’s going to have to be some support of prices if we’re going to plant corn again next year.”

Right now, Hultman said the markets are still in a “harvest hangover.”

“Overall, I tend to think that grains are near their lows because we’ve anticipated the big crop for so long that I think it’s factored into prices already,” he said. “It’s going to be helpful when we get away from talking about how big this crop is and start talking about demand.”

Farmers storing a lot of grain may want to consider a cheap put option to minimize their risk if prices tank unexpectedly, Hultman said.

“As long as you have that much risk out there, a cheap put option is always a good idea,” he said. Other than that, Hultman suggests farmers wait a month or two for cash prices to improve before making sales and then making sales at regular intervals until planting time.

Bennett and some of his clients have used more sophisticated marketing strategies, such as selling call options. That strategy allows farmers to collect an option premium, but if the futures price settles above the strike price of the option at expiration, they must also be prepared to be short the futures contract at the strike price.

“You’re going to pocket all that money if it’s treated as a true hedge,” Bennett said, cautioning that options strategies can be difficult in a sideways market and that farmers still need to pay attention to basis values.

“So many farmers are just taking a wait-and-see approach,” Bennett said.

Katie Micik can be reached at Katie.Micik@dtn.com

Follow her on Twitter @KatieMDTN

(CC/BAS)