Market Matters Blog

Cost of Carry on the Neutral-Bearish Border

By  Katie Micik

Many farmers are putting their corn in the bin this harvest season, so DTN decided to start tracking the cost of carry on a daily basis, which you can find on Ag News page 19. It'll find a home here, in my blog, every once in a while. Knowing the cost of carry can help farmers decide if the market's paying them to keep their corn in the bin.

Corn's cost of carry has weakened over the past week, DTN Senior Analyst Darin Newsom said.

"The cost of carry in corn remains borderline neutral to bearish. This continues to indicate that harvest, with its better than expected production, is offsetting stronger demand," he said. "Soybeans have seen its long-term inverse (negative cost of carry) weaken slightly due to similar projections of better than expected production. However, the nearby November to January remains well supported by strong short-term demand."

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"So, how does this cost of carry thing work?" you ask. Here are the basics, followed with a table showing the cost of carry based on how the markets closed last Friday.

Full commercial carry is the total cost of storage and interest to hold grain in commercial storage. For the corn and soybean table, DTN uses a daily storage rate of 0.00165 cents per bushel (roughly 5 cents per month) and an annual interest rate of 3.1% (this provided by one of the largest commercial grain hedging firms in the industry).

The percent of commercial carry (% FCC) divides last daily price in futures spreads by full commercial carry. The higher the percent of full commercial carry a spread reflects, the more bearish the market's view of supply and demand. Conversely, a lower percent reflects a more bullish view of fundamentals. A negative reading occurs when spreads are inverted, or in other words, when the nearby futures contract is higher priced than the deferred contract. This relationship represents a bullish supply and demand situation, with the larger the negative number the more bullish fundamentals are.

Newsom tells me that 67%, or when the spread is about 2/3 of the cost of full commercial carry, the market's paying farmers to keep their grain in their on-farm storage.

CORN

FULL SPREAD
CONTRACT SETTLE SPREAD CARRY AS % FCC
@CZ13 Dec 13 427.25
@CH14 Mar 14 437.50 10.25 18.19 56%
@CK14 May 14 445.75 8.25 12.37 67%
@CN14 Jul 14 452.25 6.50 12.41 52%
@CU14 Sep 14 458.75 6.50 12.65 51%

SOYBEANS

FULL SPREAD
CONTRACT SETTLE SPREAD CARRY AS % FCC
@SX13 Nov 13 1266.00
@SF14 Jan 14 1251.50 -14.50 16.47 -88%
@SH14 Mar 14 1237.00 -14.50 16.08 -90%
@SK14 May 14 1228.50 -8.50 16.55 -51%
@SN14 Jul 14 1224.50 -4.00 16.47 -24%
@SQ14 Aug 14 1211.75 -12.75 8.35 -153%

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Comments

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DARIN NEWSOM
11/5/2013 | 6:25 AM CST
Good comments. A stronger carry in the futures spread, accounting for a higher percent of cost of carry, indicates that a crop should be held in storage - with futures hedges (or forward sales) held against those bushels. You are correct that one shouldn't hold the bushels unprotected (in regards to price) waiting for the market to rally in a strong carry situation. If the cost of carry is high enough, yes, sales should be made for deferred delivery (e.g. March, April May, etc.). The quote you mention is correct. I call it the "Down Escalator" effect, where deferred contracts come down to where nearby contracts are trading over time. Futures spreads can indicate whether to sell, hold, or buy; but that's a discussion for a larger forum.
John De Pape
11/4/2013 | 9:04 PM CST
You say that knowing the cost of carry can help farmers decide if the market is paying them to keep their corn in the bin. I assume you mean that when there is a carry in the market - like your 67% of commercial carry - the market is paying to store on farm. Since you didn't say how, it suggests getting a higher price simply by waiting to sell later. But at the same time you say that a carry in the market is bearish, which would mean exactly the opposite - prices will be lower later. There's a saying in the trade - "markets tend to not earn their carry". This means that, all else being equal, over time the higher deferred price will gravitate down to the nearby level. In other words, you shouldn't wait for higher prices simply because there is a carry in the market. In fact, nothing in the markets are ever suggesting to wait to sell or buy, least of all spreads. The only way to earn the carry is to sell or price the grain now for deferred delivery.