This winter, you should have time to take stock of your grain inventory, update your cost of production numbers and do some math to determine your true break-even costs.
Do you have a marketing plan? Are you using it or reviewing it and making changes accordingly? Do you know your quantity and quality of your grains in store?
I’m going to assume you answered yes to the last three questions! Now, it’s a matter of figuring out how and where to market your grain. Is the market offering prices that will make you a profit? If so, should you be selling now or holding on? You have to try to figure out what the world and domestic markets are telling you by the price signals they are showing you.
World grain markets are always in flux because every month of the year there is a crop being seeded or harvested somewhere in the world. This keeps supply and demand numbers fluid and constantly changing, which then is reflected in the price that buyers are willing to pay to secure supply.
What pricing signs should you be looking for?
Futures spreads, grade and protein spreads and basis levels are the primary ones to watch and follow.
Watch the signs
Futures spreads: what are they and how do they work?
Futures spreads are the market’s indication of perceived world supply and demand for grains, and how and where buyers can buy grain, for what price.
Buyers (millers, brewers, crushers and feeders) need year-round supplies to keep their operations running smoothly. Most of them cannot store a years worth of grain or buy a year’s worth of grain 12 months in advance.
In normally functioning futures markets there is a spread, or price difference, between the various futures months. The further out months are usually at a higher value than the nearby month. This is because buyers would prefer you to store the grain so they can buy it as they need it. They realize you won’t do that unless there you have a price incentive. This is called the “cost of carry.”
In the cost of carry there is also a cost of interest that the buyers are willing to pay. This is based on what the buyer would have to pay to borrow money now to buy the grain for future use.
Needless to say trying to figure out what the full cost of carry should be is not easy. I take the futures price and multiply it by .175 for a ballpark value. This is what the full cost of carry should be in a normal market.
You can do some fast math to see if the market is paying you full cost of carry to hold your grain or not. For example:
March futures are $485. May futures are $493. July futures are $498.
Multiply $485 x .175 = $8.50. Add that to the March value and get $485 + $8.50 = $493.50. May futures are at full carry over the March futures. July is only at about 55 per cent of full carry over the May futures.
What does this tell you? In this example it could suggest that buyers are comfortable with the current supply availability in the market and are paying full carry to incent you to not sell your grain now but to carry it forward.
With the July only at 55 per cent of full cost of carry to May, it could suggest that there will be new supply coming onto the market from somewhere in the world between May and July and buyers expect that they will be able to buy it at a lower price then.
If the July were at full carry to May or above full carry, that could possibly indicate that buyers are concerned about the supply of the next crop to be harvested and they’re trying to get you to carry your grain forward. This would help them in July, should the new harvest be less than anticipated and they need your grain.
Sometimes nearby futures trade at a premium to the future months. This indicates that there is an immediate need from the buyers for the grain, and they are willing to pay a premium to get their hands on it now.
This immediate need can be for a number of reasons. The buyer may have just made a big sale for nearby delivery. There could be concerns that demand is greater than the current supply. A big harvest could be expected to come off in the next month or two — in the short term, buyers are willing to pay a little extra for old crop stocks to keep them running until the next big harvest comes off — there can always be weather delays and they don’t want to be caught without supplies to keep operations running. The forward months don’t have any cost of carry included — buyers know the full crop can’t all come to market at the same time and are willing to wait and buy as they need it.