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Bin Doors Slam Shut on Corn
Friday, November 21, 2014 2:33PM CST

By Katie Micik
DTN Markets Editor

Editor's note: DTN Senior Analyst Darin Newsom and South Dakota farmer and former broker Tregg Cronin will discuss tactics to optimize storage and marketing practices at DTN University's Master Marketing course preceding the Ag Summit on Dec. 7. For information on the Summit and DTN University courses go to www.dtnagsummit.com.

OMAHA (DTN) -- Farmers put the bulk of this year's corn crop in storage and the bin doors probably won't start opening until March, several analysts said.

Sterling Liddell, a grain and oilseed analyst with Rabobank's Food and Agribusiness Research and Advisory, said farmers' decision to store corn is one of the signature dynamics of this marketing season.

"They're in a financial position to hold on to it instead of having to liquidate it from a cash flow perspective," he told DTN. "That puts them in the driver's seat for at least this year. They can hold on and see what happens to prices in the future."

Liddell said elevators aren't asking for money to finance inventory, which suggests that much of the corn crop is being stored on farm. If it is stored in elevators, farmers are paying storage fees instead of selling the grain.

"They're doing price-later contracts. They're doing deferred-payment contracts and looking into next year before they actually start pricing this grain," he said. "Clearly the fact that prices are below their breakeven is playing into this. It's hard to sell grain at below-breakeven prices, especially if you think you have the option of selling it" later for a better price.

DTN Senior Analyst Darin Newsom said farmers saw the carry in the December-to-March futures contracts at harvest and decided the market was paying to put grain in the bin. A market is considered to be in a carry situation when subsequent futures contracts trade at a progressively higher price level (for example, the first deferred contract is priced higher than the nearby contract).

"Despite all the talk of this record crop and large ending stocks, the deferred carry just isn't that strong," Newsom said. Last week, the carry from the December-to-March contracts was at about 13 cents; the March-to-May carry about 9 cents; the May-to-July about 7 cents.

"It just makes everybody sit back and wait and see," Newsom said. "Maybe your best opportunity right now is to keep it hedged out to March and see if the carry out to May or July starts to strengthen over the course of the winter."

Then farmers will have to decide whether to roll their hedges forward to May or July or to sell the cash grain. March and June to July are likely to be the two biggest times of cash corn movement, he said.

Newsom said it makes sense some farmers would sell cash grain before they get busy in the fields with planting. There could also be a cash-flow dynamic to the sales since cash rents come due in February and March and farmers are buying inputs for the new crop, Liddell said.

"And if this crop was put up wet, say above 14% to 17% moisture, then when temps start to increase, we'll start to see bins heat up and see quality issues on this corn," Liddell said. "It will force some liquidation at that point."

If the carry doesn't strengthen by spring time, the traditional philosophy on storage is to lift hedges and sell the grain. "If the market's not going to pay you to hold it, don't hold it," Newsom said.

But according to the way Newsom analyzes the markets, a weakening carry means the markets are turning more bullish, and farmers want to be long cash grain in bullish supply-and-demand situations.

There's no good answer to the apparent conflict in advice, Newsom said. Farmers need to think about how much risk their farm can tolerate.

"You can't have an uptrend in the market unless you have a strong carry to begin with. It hasn't moved there yet, but the deferred spreads could," Newsom said. "And what it tells me is, if I'm a farmer, I'm watching the spreads, I'm watching the basis, looking for some opportunities to sell the bulk of my old crop."

Farmers will also likely flood the market with corn sales in July as they prepare for harvest, but Newsom said some farmers may not completely empty their bins, depending on what the new-crop situation looks like.

Planting then becomes the next real critical period for prices, Liddell said. Earlier in November, private analytical firm Informa Economics forecast farmers planting an equal amount of corn and soybean acres at 88.3 million apiece.

Newsom cautioned that yields are likely be lower next year, too. Historically, when the average yield comes in above trendline one year, it comes in below trendline the next four, but that's not a hard-and-fast rule, Newsom said.

"All that confirms is what we've been saying: Mother Nature doesn't play nice that often. Ideal growing situations don't happen every year," he said. If acres are reduced next year and there's a weather problem, ending stocks could decline.

"I'd probably own cash corn or not have much of my 2015 production sold, because that's where the opportunity lies," Newsom said. "Certainly, farmers should watch for market structure developments in the new crop as we continue to get rid of our old crop."

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

Follow Katie Micik on Twitter @KatieMDTN


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