Video 1 - 2020 Virtual Nebraska Soybean Day and Machinery Expo
Deloris Pittman
Author
12/21/2020
Added
42
Plays
Description
Opening Comments
Keith Glewen, Nebraska Extension Educator
How to Get $4 Corn and $10 Soybeans
Ed Usset, Grain Marketing Specialist, University of Minnesota
Searchable Transcript
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- [00:00:10.017](mumbles) We'd like to welcome you
- [00:00:11.410]to the Nebraska Soybean Day Machinery Expo.
- [00:00:15.540]My name is Keith Glewen and I'm an Extension Educator
- [00:00:18.440]and I'm located at the Eastern Nebraska Research
- [00:00:21.290]and Extension Center which is near Mead, Nebraska.
- [00:00:24.630]It is a beautiful day on the Prairie.
- [00:00:26.700]And behind me is what it could have been.
- [00:00:29.810]If it wouldn't have been for the pandemic
- [00:00:32.760]we have a view there of previous year's expo.
- [00:00:36.792]And unfortunately, as we all know
- [00:00:41.430]and have experienced life is different on a daily basis.
- [00:00:45.200]And hopefully all of us will be in a situation
- [00:00:49.030]or a position next year, where we can gather again
- [00:00:52.430]and enjoy some great speakers
- [00:00:54.938]and communicate amongst ourselves.
- [00:00:59.200]That's part of the learning experience.
- [00:01:02.000]And we have found that out for quite a few years.
- [00:01:05.780]This has been a partnership with Nebraska Soybean Board
- [00:01:09.290]for over 20 years, and we are very appreciative of that.
- [00:01:13.580]And we feel it's been of great value
- [00:01:16.020]to the soybean growers in Nebraska.
- [00:01:21.350]So with that, I'm going to encourage you
- [00:01:24.970]throughout the day.
- [00:01:26.120]If you have questions that you type them in the chat box
- [00:01:30.500]and at the bottom of your screen,
- [00:01:32.210]there should be a toolbar
- [00:01:34.480]or at the top of the screen possibly
- [00:01:37.520]there should be a toolbar
- [00:01:38.740]that you can type in to the panelists.
- [00:01:43.960]And that will be just the presenters that we'll see that.
- [00:01:47.850]So if you want everyone to see the question
- [00:01:50.680]you have the selection capability there to share it
- [00:01:54.150]with everyone, but we encourage you to ask questions
- [00:01:59.800]during the day through the chat box.
- [00:02:02.330]And if you're not familiar with that
- [00:02:04.110]it's an easy process again, on your toolbar
- [00:02:07.650]either at the bottom or the top of your screen,
- [00:02:11.420]there'll be a icon there and we'll say chat
- [00:02:14.630]and you click that on and you can then type in your question
- [00:02:19.960]and the panelists, the presenters will be able to view it.
- [00:02:26.820]So with that
- [00:02:28.320]I'm going to introduce our first speaker Ed Usset
- [00:02:32.530]Dr. Ed Usset is from the University of Minnesota
- [00:02:36.340]Farm Financial Management Network.
- [00:02:39.200]And Ed is a Grain Marketing Economist
- [00:02:43.220]and Ed is back by popular demand.
- [00:02:46.300]We've had a number of people said,
- [00:02:47.560]Hey when are you going to bring Ed back?
- [00:02:50.195]He had a lot of good information in the past.
- [00:02:53.630]And so when you get feedback like that
- [00:02:57.830]certainly we made the effort to see
- [00:03:01.350]that we can bring Ed back from Minnesota.
- [00:03:04.950]We had some Minnesotas in town last week, Saturday
- [00:03:09.530]and we just won't take that any further.
- [00:03:12.320]It was quite of a disappointment for us
- [00:03:14.350]but I know Ed's been uplift our spirits here
- [00:03:17.150]and share with us some important information and value
- [00:03:22.415]in enhancing our profitability potential as we move forward.
- [00:03:26.570]So good morning, Ed and I turned the helm over to you.
- [00:03:33.667]Thank you Keith and good morning everybody
- [00:03:36.667]let me share my screen here.
- [00:03:41.980]Can you see my screen?
- [00:03:44.780]Can you see my PowerPoint?
- [00:03:47.200]I can see your PowerPoint Ed.
- [00:03:49.010]Okay
- [00:03:49.843]Well settle in people.
- [00:03:51.980]We've got a morning here.
- [00:03:53.490]I'm going to give you three different talks
- [00:03:56.270]each about a half hour
- [00:03:58.390]and I'm gonna start this morning with a chat
- [00:04:02.010]on how to get something that called How to Get $4 Corn.
- [00:04:06.790]It could easily be called how to get $10 soybeans
- [00:04:10.210]or Maybe even how to get $6 a week.
- [00:04:13.390]It's really not about just $4 corn or $10 soybeans.
- [00:04:19.350]What this is about is marketing from start
- [00:04:23.020]to finish combining pre and post this marketing
- [00:04:27.130]efforts to get the best price
- [00:04:32.650]possible for your grain.
- [00:04:36.460]Keith, I wanna thank you for the invitation to be a part
- [00:04:39.760]of this again, and to be a part
- [00:04:43.460]of the Nebraska Soybean Day and Machinery Expo.
- [00:04:46.610]I don't think we're gonna be looking at much machinery
- [00:04:49.230]except virtually today, but I really appreciate it.
- [00:04:53.320]I appreciate all the sponsors you've gathered
- [00:04:55.840]to help put this day together.
- [00:05:00.180]In years past it's apt that I talk about this
- [00:05:04.740]and for a Nebraska program, because years ago, 20 years ago
- [00:05:10.840]I had a hand in developing a program that really started
- [00:05:15.840]in Nebraska called Winning the Game
- [00:05:18.600]had a great run for a couple of decades for 15 years.
- [00:05:23.210]And I continued to do these half-hour workshops.
- [00:05:27.110]Now we took Winning the Game
- [00:05:29.270]and turned it into two different programs.
- [00:05:32.520]One was a Pre-harvest slant
- [00:05:34.750]one was a Post-harvest slant activities
- [00:05:37.770]you should take before harvest to price grain
- [00:05:40.980]activities you should take after harvest to price grain.
- [00:05:45.910]And we made it a point
- [00:05:48.290]in Winning the Game to separate these issues.
- [00:05:52.260]And we did it for a reason
- [00:05:53.810]because forward pre-harvest marketing is very strategic
- [00:05:57.920]it's forward-looking it's written early.
- [00:06:02.510]Your marketing plan is you think about your production costs
- [00:06:06.280]when writing a pre-harvest marketing plan.
- [00:06:09.200]Post-harvest marketing is more deliberate.
- [00:06:13.435]You put together
- [00:06:16.230]it's a very tactical approach to writing a marketing plan
- [00:06:20.280]very written at the moment, the purpose what's the carry
- [00:06:24.120]in the market, what's the basis.
- [00:06:26.010]And you're asking yourself
- [00:06:27.370]about the opportunity to store grain.
- [00:06:30.160]So they're very different approaches.
- [00:06:32.050]The only thing they have in common is seasonal patterns.
- [00:06:36.340]Point two April, May, June as a good time,
- [00:06:42.140]to get something done
- [00:06:43.350]not only before harvest, but after harvest.
- [00:06:46.950]I bring up Winning the Game because how to get $4 corn
- [00:06:51.270]in creating this program a year ago.
- [00:06:54.900]Now we're trying to put the two together
- [00:06:58.300]rather than work hard to separate them.
- [00:07:00.730]Let's put pre and post harvest marketing together.
- [00:07:04.100]Let's make them work together,
- [00:07:05.970]or as we like to call it marketing from start to finish.
- [00:07:10.030]So let me tell you how to get $4 corn
- [00:07:12.770]or $10 soybeans or $6 a week.
- [00:07:16.330]It's a three step process.
- [00:07:18.640]The first we'll price grain
- [00:07:20.280]before harvest using Hedge-to-Arrive a futures contract
- [00:07:24.020]or put options.
- [00:07:25.660]At harvest we're gonna store the grain on our farm.
- [00:07:28.790]This is some job on farm storage
- [00:07:31.260]and we're gonna roll that hedge forward
- [00:07:33.280]into the following spring.
- [00:07:35.370]And then with a better spring basis
- [00:07:38.360]we're gonna price and deliver the grain.
- [00:07:42.600]Let me show it to you mathematically.
- [00:07:44.620]Now here,
- [00:07:47.870]I want you to understand this needs to be adjusted
- [00:07:51.210]for your basis levels in Nebraska, wherever you are.
- [00:07:57.800]It starts with the sale of December corn futures.
- [00:08:02.050]Now I'm emphasizing the corn example
- [00:08:08.370]but we can imagine this with soybeans and wheat
- [00:08:11.840]we will start
- [00:08:12.750]with the sale of 4.10, December corn futures.
- [00:08:16.370]I'm assuming 0.50 under harvest basis.
- [00:08:19.760]This is very much a Southern Minnesota view of things.
- [00:08:23.570]Your in Nebraska, different parts of Nebraska Eastern
- [00:08:27.580]versus Central, Northern versus Southern.
- [00:08:30.290]You need to adapt this
- [00:08:32.370]to your own area
- [00:08:34.150]4.10 less 0.50 under basis.
- [00:08:36.410]That gets me to a three 3.60 harvest price work.
- [00:08:40.270]We're gonna roll that hedge from the December to July
- [00:08:43.700]at a 25 cent positive carry something that is done easily
- [00:08:50.080]in recent years, except for this year.
- [00:08:52.510]And we'll talk about that.
- [00:08:54.140]Add to that and the assumed 15 cent basis improvement.
- [00:08:58.730]And you've got $4 corn by spring of 2022.
- [00:09:04.160]We're looking ahead now, people, the 2020 crop is behind us.
- [00:09:09.210]This is how to get $4 corn on the 2021 crop
- [00:09:14.630]and it'll land in the spring or early summer of 2022.
- [00:09:21.080]Now let's break this down a bit.
- [00:09:25.890]What's the chance we're gonna get
- [00:09:29.850]4.10 December futures.
- [00:09:32.430]Well, if you look at, and I'm looking at 2015 forward
- [00:09:38.980]we can go back 10 years when $4 corn was easy.
- [00:09:42.300]You're all have everyone has this memory
- [00:09:45.410]of 5 and 6 and sometimes $7 corn
- [00:09:49.100]in the second golden age of agriculture.
- [00:09:52.000]But that story is behind us now.
- [00:09:54.760]And you note that since 2015
- [00:09:59.300]even though for many of those years, prices were quite low.
- [00:10:04.210]Every one of those years gave us a shot
- [00:10:06.600]at 4.10 December futures.
- [00:10:08.720]And in fact, as I speak today
- [00:10:11.070]that the December 21 contract is traded
- [00:10:15.730]at 4.14, a bushel.
- [00:10:20.400]There we are, that we could get started today.
- [00:10:24.290]We're kind of rolled that hedge from December
- [00:10:26.640]to July at a 25 cent carry I'm talking about the carry
- [00:10:31.960]from the December 21 contract to the July 22 contract.
- [00:10:37.350]Here's the picture at harvest in 2017
- [00:10:41.427]but carry was particularly large that year
- [00:10:45.010]December set 3.53
- [00:10:47.107]the July at 3.83, a 30 cent carry.
- [00:10:51.070]You're gonna buy back your December futures
- [00:10:53.570]hedge or roll the HDA
- [00:10:57.330]from the December contract to the July contract.
- [00:11:00.830]You get the hang on to that carry.
- [00:11:04.640]Yeah, 25 cents.
- [00:11:06.310]Is this a realistic assumption?
- [00:11:10.150]Large caries are common in the corn market.
- [00:11:13.220]They weren't there this year.
- [00:11:14.990]This year, that 2020, was an exception
- [00:11:18.490]but in fact, we've been at our close 25 cents each
- [00:11:22.630]of the last five years prior to this year.
- [00:11:25.690]And currently that spread is from December of 2021
- [00:11:32.750]to July of 22.
- [00:11:34.210]I know I'm bending your head, a bit.
- [00:11:37.500]I'm making you look a year to year and a half out.
- [00:11:40.630]It's only 6 cents a bushel.
- [00:11:43.200]And we'll talk about that.
- [00:11:45.200]I think it's gone wide.
- [00:11:47.270]Finally, a 15 cent basis improvement
- [00:11:51.400]from the harvest basis versus the Dec to the July basis
- [00:11:59.120]the spring basis versus the July
- [00:12:02.350]and 2019 27 stands out as being the opposite.
- [00:12:08.140]However, before that a 15 cent improvement
- [00:12:13.017]was a possibility.
- [00:12:14.460]And I think it's realistic
- [00:12:15.950]by the way, my numbers here
- [00:12:18.200]are average Iowa numbers
- [00:12:20.400]and I hate using average numbers for basis
- [00:12:24.490]because it takes all the fun out of basis.
- [00:12:27.930]Things happen with basis.
- [00:12:29.430]If you shop around.
- [00:12:33.200]If those things happened
- [00:12:36.060]I've got $4 corn or better by the spring of 2022.
- [00:12:41.590]Now you can use your imagination
- [00:12:46.560]say starting with 10.50 November soybean futures right now
- [00:12:52.740]but we have to talk about soybeans
- [00:12:54.630]because that large carried harvest is not common.
- [00:12:58.630]Hybrid winter wheat,
- [00:13:00.110]I know there's a lot
- [00:13:01.190]of hybrid winter wheat grown in Nebraska
- [00:13:03.371]and we've had a nice rally in the July, 2021 contract.
- [00:13:09.090]There May be opportunities
- [00:13:10.620]for this approach to don't get hung
- [00:13:12.890]up on one number $4 corn, $10 soybeans.
- [00:13:17.440]Focus instead on this idea of marketing from start
- [00:13:21.480]to finish thinking about pre-harvest opportunities
- [00:13:25.210]add to a post-harvest opportunities to get a good price.
- [00:13:31.230]Here's a review of the opportunities
- [00:13:35.580]at certain taken the most recent year
- [00:13:37.970]out of the picture was just such a strange one.
- [00:13:40.860]We didn't get the 4.10
- [00:13:42.410]in the December contract of the harvest of this year.
- [00:13:45.590]Really wasn't a pre-harvest opportunity.
- [00:13:48.200]There was no carry, and we stumbled our way
- [00:13:51.020]to $4 corn anyway,
- [00:13:53.920]but if you look at the years, 2015 to 19
- [00:13:57.980]those years every one of them had a harvest price.
- [00:14:02.300]Well below $4, a bushel, sometimes below $3 a bushel.
- [00:14:07.290]And yet I'm here to tell you that in every one
- [00:14:10.330]of those years, using this long approach of combining pre
- [00:14:15.250]and post office marketing, you had an opportunity
- [00:14:18.570]at $4 and sometimes better cash price on corn,
- [00:14:24.010]even in 2017 where the opportunity to sell
- [00:14:28.480]D set 4.10 or better was short.
- [00:14:33.300]It was only a week long.
- [00:14:34.900]You had a shot
- [00:14:35.733]at $4 corn when the harvest price was $3 or less.
- [00:14:41.850]Well, I've got a pre-harvest marketing plan for corn.
- [00:14:45.910]And then my next talk that follows this,
- [00:14:48.240]I'll talk about how I develop that.
- [00:14:51.450]You will note that my minimum price here is 4.25
- [00:14:55.880]December futures.
- [00:14:57.470]And as we speak
- [00:14:58.860]the December 21 contract is trading 11 cents
- [00:15:02.900]below that at 4.14.
- [00:15:06.430]Well, we'd like to get some done early
- [00:15:10.660]because of this tendency
- [00:15:12.230]for prices to go lower in the spring.
- [00:15:15.430]And I'm making the argument here that if I'm looking
- [00:15:19.950]for a $4 cash price,
- [00:15:23.440]that 4.25 minimum in my marketing plan
- [00:15:27.930]really reflects my cost of production.
- [00:15:30.420]How can I justify starting today at 4.14?
- [00:15:34.660]I can do so
- [00:15:35.630]because I anticipate benefits
- [00:15:38.270]from post-harvest marketing too.
- [00:15:43.630]We like to get things done in the spring.
- [00:15:45.780]And we'll talk about this more when I get into developing
- [00:15:49.940]a pre-harvest marketing plan.
- [00:15:52.000]Well, let's meet a few producers who can help us
- [00:15:55.960]understand the value of pre-harvest marketing.
- [00:15:59.070]I've got a friend Barney Binless
- [00:16:00.840]who has no storage and no one interest in early pricing.
- [00:16:04.350]He simply sells at harvest.
- [00:16:06.230]He represents the harvest price for corn
- [00:16:08.850]and soybeans and wheat,
- [00:16:11.220]and he gives us something to compare to.
- [00:16:14.530]Now, I want you to meet a new character of mine.
- [00:16:17.210]This is Aunt Tilly
- [00:16:18.860]and she has a very simple pre-harvest marketing plan.
- [00:16:22.380]She makes new crop sales in March, April, May
- [00:16:26.437]and June four months
- [00:16:28.990]20% sales each month for a total of 80%
- [00:16:34.410]which matches up with her crop insurance selection
- [00:16:38.430]and the remaining 20% that is done insured.
- [00:16:41.750]And unpriced before harvest is priced
- [00:16:44.554]at Barney's harvest price.
- [00:16:46.926]And this part of the results you will see here.
- [00:16:50.960]And finally, we have Uncle Buck who does the same thing
- [00:16:55.180]as Aunt Tilly on the same day, by the way
- [00:16:57.780]they take action on the Tuesday
- [00:17:00.620]between the 4th and the 10th of each month.
- [00:17:03.110]There's no picking at the best day.
- [00:17:05.360]It's already predetermined the Tuesday
- [00:17:07.930]between the 4th and 10th of each month.
- [00:17:10.550]Tilly and Buck take action, March, April, May, and June.
- [00:17:15.120]The difference is Tilly uses futures directly.
- [00:17:20.820]Uncle Buck buys put options
- [00:17:24.290]buys the right to sell December corn futures.
- [00:17:28.190]That's the difference between them?
- [00:17:30.470]Well, I've got a, you May not be convinced only 32 years
- [00:17:35.680]of data using Iowa average corn prices.
- [00:17:39.580]Over that 32 year period.
- [00:17:42.020]Barney is average 2.91 for cash corn.
- [00:17:45.600]Tilly is doing 16 cents a bushel better
- [00:17:49.009]on every bushel of corn produced over a 32 year period.
- [00:17:56.530]Remember now, 20%
- [00:17:58.660]of Tilly's price is Barney's price.
- [00:18:03.030]Uncle Buck not selling futures,
- [00:18:06.210]but choosing to buy put options.
- [00:18:08.930]Also beats Barney by 8 cents a bushel.
- [00:18:12.010]I'm impressed by that
- [00:18:13.560]but that do as well as Tilly,
- [00:18:15.530]options that costs money.
- [00:18:17.390]How often did Tilly beat Barney out of 32 years?
- [00:18:24.610]Well, 24, 32 years, three out of four years
- [00:18:28.860]Tilly is beating Barney with this simple strategy.
- [00:18:32.120]Buck is beating Barney six out of 10 years.
- [00:18:35.930]I also like to look
- [00:18:37.280]at the bottom line there years with more than a 10% margin.
- [00:18:42.140]Okay, if you're selling $4 corn
- [00:18:44.660]and it's subjective on my part,
- [00:18:48.930]but I'm saying if I can beat my neighbor by more than 10%
- [00:18:54.310]that's not a close call.
- [00:18:55.850]That's a round.
- [00:18:57.223]And I look at how often these characters beat each other
- [00:19:02.840]by more than 10%.
- [00:19:04.310]Well, Tilly has beaten Barney
- [00:19:07.130]in over half the years, 17 of 32 years
- [00:19:10.700]by more than 10%, Barney has his moments
- [00:19:14.850]and beats Tilly by more than 10% in six years
- [00:19:19.570]Buck has a 5-0 edge on a years greater than 10%.
- [00:19:25.870]This is just some data on by,
- [00:19:27.727]and this is just some background on my data.
- [00:19:30.390]I want you to understand I don't a back test
- [00:19:35.256]or select a great day in June to make Tilly look good.
- [00:19:40.700]And the worst day in October to make Barney look bad.
- [00:19:44.160]Barney's the Friday between October 12 and 18 period.
- [00:19:49.030]And there's only one every year.
- [00:19:52.940]Let's talk about carrying charges because we have to talk
- [00:19:56.010]about post office marketing too.
- [00:20:00.420]Carrying charges at the price differences
- [00:20:02.780]between features delivery months.
- [00:20:04.720]I'm talking about December to July corn
- [00:20:07.780]November to May soybeans, and they speak to this question.
- [00:20:11.950]Should I store grain or not?
- [00:20:13.570]I want to take a look quick review of carrying charges.
- [00:20:17.970]This is the corn market at harvest in 2013,
- [00:20:23.870]don't get hung up on the year.
- [00:20:25.940]This is in fact that you'll understand
- [00:20:29.540]in the moment why I chose 2013.
- [00:20:35.060]You see a positive carry here.
- [00:20:37.590]You see that the December contract
- [00:20:41.040]which was trading 4.42 in 2013
- [00:20:45.340]you see the March is at a premium to December
- [00:20:48.350]May at a premium to March, July at a premium to May.
- [00:20:53.090]This is what we call a positive carrying charges.
- [00:20:56.470]And these price differences you see
- [00:20:58.500]in the market are in fact market determined storage costs.
- [00:21:03.990]Now for the moment, I want you to think about two terms
- [00:21:07.620]carrying charges and storage costs.
- [00:21:11.560]They're synonymous.
- [00:21:13.580]When we talk about positive carrying charges
- [00:21:16.370]we're talking about positive storage costs.
- [00:21:19.670]This is a very common result in the corn market.
- [00:21:24.810]Our largest crop, large carrying charges
- [00:21:28.810]where the deferred contracts traded a premium
- [00:21:31.610]to nearby are common.
- [00:21:33.500]When pre-supplies are large
- [00:21:35.920]and this is a common occurrence in the corn market.
- [00:21:39.490]It's an incentive
- [00:21:42.820]for people to add harvests.
- [00:21:45.570]There's an incentive here
- [00:21:47.060]for people who own storage to store today
- [00:21:50.350]and sell tomorrow at a premium.
- [00:21:53.830]Now to fully understand the positive
- [00:21:56.220]carrying charge we need to look
- [00:21:58.590]at well in this case the same day
- [00:22:01.890]but at different commodity soybeans.
- [00:22:04.940]This is the soybean market in October of 2013
- [00:22:09.120]and now you've got negative carry.
- [00:22:12.000]You've got the November contract trading close to $13
- [00:22:17.150]a bushel, but each subsequent contract, the March
- [00:22:21.240]the May, the July, the August are all at a discount.
- [00:22:25.360]This is what we call negative carrying charge
- [00:22:27.810]or an inverted market.
- [00:22:29.550]The deferred contracts traded the discount.
- [00:22:32.510]This is what happens when supplies are small
- [00:22:36.270]or there's a scarcity stacks that might be a small crop.
- [00:22:40.440]It might be good demand.
- [00:22:41.850]It might be a combination of the two.
- [00:22:44.200]This is a market that is not rewarding storage.
- [00:22:48.180]It's saying to you, "I need your grain now
- [00:22:51.130]not later."
- [00:22:54.670]Well, carrying charges are this incentive
- [00:22:57.050]to store today and sell tomorrow.
- [00:23:00.980]It's a hedge against lower prices
- [00:23:03.477]and you capture return to care as to storage.
- [00:23:07.990]This 30 cent carry
- [00:23:10.070]or maybe 25 cents in the year ahead.
- [00:23:13.300]It's gonna be low
- [00:23:14.500]different every year I can put asset as an owner of storage.
- [00:23:19.330]I can put that in my pocket.
- [00:23:21.700]I have three ways to do it.
- [00:23:23.710]I can forward contract for spraying delivery of grain.
- [00:23:29.770]I can use a Hedge-to-Arrive contract.
- [00:23:32.400]I can sell futures directly.
- [00:23:37.270]Now here's the question you might all have,
- [00:23:40.630]is I talk about hedging in the December 21 contract
- [00:23:45.500]and rolling it later to the July 22.
- [00:23:50.050]And some of you are thinking, well,
- [00:23:52.670]I just don't quite understand it.
- [00:23:55.240]Why don't you just place the hedge right
- [00:23:58.390]into the July 22 contract right now, 18 months out.
- [00:24:03.260]Why do you add that extra step?
- [00:24:05.560]And I'll tell you why carrying charges, particularly
- [00:24:09.770]in corn, have a strong tendency to widen over time.
- [00:24:18.720]This is a very long-term average of the December
- [00:24:23.820]July corn futures spread going back
- [00:24:27.570]I think 19 years of data.
- [00:24:29.710]And this is the December
- [00:24:31.890]in orange and the July in gray.
- [00:24:35.250]The following July, you can see a positive carry on average.
- [00:24:39.890]Can you see it widening?
- [00:24:42.250]And you know what?
- [00:24:43.550]I can't see it either.
- [00:24:45.170]It's too subtle.
- [00:24:46.620]How about if I plot it on the other axis?
- [00:24:50.030]Do you see it now?
- [00:24:51.600]This is the carry going from an average
- [00:24:55.060]of 15 to 16 cents early in the year
- [00:24:59.390]and widening out to 23, 24 cents.
- [00:25:03.050]By the end of the year, you see it now?
- [00:25:06.730]The fact is since 2000, only three years
- [00:25:11.010]and we include 2020 this year
- [00:25:14.760]get this spread narrow from early in the year to late near.
- [00:25:20.000]In other words go the opposite way.
- [00:25:23.860]17 out of 20 years is pretty good at that
- [00:25:26.843]that carry is gone, widened and widened a lot, by the way
- [00:25:30.350]they've changed the contract terms at the CMA group on corn.
- [00:25:36.880]And even though it didn't work out this year
- [00:25:39.950]because of a lot of different things going on
- [00:25:42.110]and really good demand,
- [00:25:45.100]I could anticipate
- [00:25:46.510]in the years ahead, I can imagine that December
- [00:25:50.070]July spread not being 25 cents, but I could imagine it
- [00:25:54.630]on a bumper crop year being 30 to 35
- [00:25:59.190]I couldn't even wrap my mind around 40 cents based
- [00:26:02.180]on the changes that occurred in that contract.
- [00:26:07.250]Now, carrying charges are heavily influenced
- [00:26:10.260]by interest rates, higher interest rates
- [00:26:12.530]higher carrying charges prices in general and the CME rules.
- [00:26:18.770]So while I lay out a scenario that says 25 cents in corn
- [00:26:24.010]which ought to be 35 to 40 cents in soybeans
- [00:26:27.400]the CME rules have been adapted.
- [00:26:30.100]And we may have to change our sense
- [00:26:33.610]of what a large carry is in future years.
- [00:26:36.140]But for now I'm comfortable looking at 25 cents.
- [00:26:41.520]This shows you a little history
- [00:26:45.610]of carrying charges from 2000
- [00:26:48.800]to over the last 20 years.
- [00:26:51.510]And most years, 17 of 21 years
- [00:26:55.860]showed a large carrier harvest only 2002, 2006,
- [00:27:00.800]that drought year of 2012.
- [00:27:02.980]And of course the most recent year showed
- [00:27:05.590]what I would call a small carrier harvest.
- [00:27:10.840]So carrying charge is just a wrap up there
- [00:27:14.070]common and often very large in the corn market.
- [00:27:17.150]Soybeans, not very common they happen.
- [00:27:22.470]And you have to that's where this particular strategy
- [00:27:28.850]is more of a challenge in the soybean market.
- [00:27:32.790]We've seen larger carries
- [00:27:34.460]in recent years in the wheat market.
- [00:27:36.450]For those of you who grow hard, red winter wheat.
- [00:27:41.030]So we've got three choices here after harvest.
- [00:27:44.880]Now they understand carries.
- [00:27:46.550]I can sell grain at harvest like Barney.
- [00:27:49.250]I can hold grain in storage to sell later.
- [00:27:51.910]That's what my friend May Sellers does.
- [00:27:54.170]You're gonna meet her and hold grain and sell the carry.
- [00:27:59.900]I've got a decision tree.
- [00:28:01.360]We're not going to go through that.
- [00:28:02.810]All I want you to note in my decision tree
- [00:28:05.280]which is laid out in my book
- [00:28:07.410]is that the top of the tree
- [00:28:09.710]is what's the carry in the market?
- [00:28:12.640]We spent time on carrying charges.
- [00:28:15.470]We'll spend time on it in some later talks today.
- [00:28:19.420]It's a really important concept
- [00:28:21.600]in the world of grain markets, carrying charges.
- [00:28:24.860]Tell us something about the market
- [00:28:27.200]in some very important things about it.
- [00:28:32.250]You've met Barney, but May Sellers.
- [00:28:34.320]Now we're talking post-harvest.
- [00:28:35.900]This is the other half of marketing.
- [00:28:37.940]The post-harvest side of marketing May has great storage
- [00:28:42.250]on our farm room for 80% of her crop.
- [00:28:45.730]And she puts her crop in the bin unpriced
- [00:28:48.460]and waits until the last week of May to make a sale.
- [00:28:52.760]By the way, 20% of her grain that you can't store
- [00:28:56.240]is priced at Barney's harvest price
- [00:28:59.440]and is part of the result you'll see,
- [00:29:01.820]by the way, here's a long-term chart.
- [00:29:06.970]Of Iowa corn prices.
- [00:29:08.410]Don't let the Iowa get you hung up.
- [00:29:11.060]If I had the same data
- [00:29:12.640]for Nebraska or Minnesota or Missouri or Illinois
- [00:29:17.040]the chart looks the same cash prices are weakest
- [00:29:20.490]at harvest highest in the spring.
- [00:29:22.840]Being late May into the first half of June.
- [00:29:28.010]Now I've got Earl Eitheror also.
- [00:29:30.940]When carrying charges are large
- [00:29:33.780]as they often are in corn
- [00:29:37.440]Earl is gonna sell the carry store grain
- [00:29:40.330]and hedge in July contract.
- [00:29:43.580]When they are small
- [00:29:45.830]Earl will do exactly what May Sellers does
- [00:29:49.070]and store unpriced grain in the bin.
- [00:29:52.169]It doesn't happen a lot
- [00:29:53.490]but he did it this year.
- [00:29:54.870]This fall Earl like May has unpriced corn in the bin.
- [00:29:59.230]by the way, I don't like May an Earl ignore storage costs.
- [00:30:03.810]And I am going to charge them variable storage costs
- [00:30:08.600]interest on their money and 8 to 11 cents a bushel
- [00:30:12.820]for shrink on corn and soybeans, respectively.
- [00:30:20.050]Here's how Earl sells the carry at Harvard.
- [00:30:25.330]I'm using 2017 as an example at harvest,
- [00:30:31.740]you can see that the harvest price
- [00:30:34.070]at 3.03 is 50 under.
- [00:30:36.560]He puts the crop in storage with the basis of 50
- [00:30:40.430]under the Dec or 80 cents
- [00:30:43.960]under the July 3.03 relative that
- [00:30:47.870]to the July contract at 3.83, it's 80 under the July.
- [00:30:53.290]He's gonna sell the carry by either calling a broker
- [00:30:57.630]and selling July futures, or if he had a Hedge-to-Arrive
- [00:31:02.270]on that December contract is gonna go talk
- [00:31:05.410]to the elevator manager
- [00:31:07.590]and roll that hedge forward to the July for 30 cents.
- [00:31:13.400]I think I wanna emphasize
- [00:31:16.420]that if you're gonna use a Hedge-to-Arrive
- [00:31:19.530]your elevator may charge you fees.
- [00:31:22.000]Go check on that and also make sure
- [00:31:24.760]that your elevator allows you to roll that hedge forward
- [00:31:29.910]once within the crop year most do.
- [00:31:33.680]It's very common, but you should read the specifications
- [00:31:39.590]in your contract and make sure that can be done.
- [00:31:44.010]Now, if we get to a 35 under basis by spring, early summer
- [00:31:51.430]and this is a very Southern Minnesota type viewpoint
- [00:31:55.410]but it May hold true for much of Eastern Nebraska.
- [00:31:58.670]If I can get there, I'm gonna end up
- [00:32:01.620]with a cash price of 3.48, but you know what?
- [00:32:06.060]I used real numbers from 2017
- [00:32:10.812]and the spring of 2018, it didn't get the 35 under
- [00:32:15.210]it got the 40 under and I ended up at $3 and 43 cents.
- [00:32:20.970]That's how Earl sells the carry.
- [00:32:25.520]Well, here's their results.
- [00:32:27.190]30 years of data.
- [00:32:28.330]This is crop year.
- [00:32:29.950]So the 2019 crop year ends.
- [00:32:33.410]And of course at the end of summer
- [00:32:36.010]of 2020 May Sellers
- [00:32:42.500]is beating Barney by 16 cents a bushel
- [00:32:46.400]on every bushel of corn produced over a 30 year period.
- [00:32:51.610]Earl is also beating Barney by 11 cents a bushel.
- [00:32:55.750]Here's what I've found.
- [00:32:56.950]You might say, well, May's got the right approach
- [00:32:59.700]but there's more risk here.
- [00:33:02.740]May is beating Barney in 19 of 30 years
- [00:33:06.840]two out of three years.
- [00:33:08.930]Barney beats May at third at the time,
- [00:33:11.670]holding unpriced grain has risks.
- [00:33:14.380]Anyone who did it last year knows that very well.
- [00:33:19.760]Look at May, Earl, Buck
- [00:33:21.470]even though he averages 5 cents less
- [00:33:23.850]he had hedging takes away a couple of those boom years.
- [00:33:28.820]He's beating May 27 of 30 years, 90% of the time.
- [00:33:36.350]That's what you call a consistent performance
- [00:33:41.040]May had to sell 11 years where she's beaten Barney
- [00:33:45.610]by more than 10%, but Barney, including last year
- [00:33:50.130]this last year has beaten Barney on occasion
- [00:33:52.870]by more than 10% Earl, much more subdued has beaten Barney
- [00:33:58.130]by more than 10%, four times, but never gets what (mumbles).
- [00:34:04.560]Okay.
- [00:34:06.230]Well, I wanna explore 30 years of history.
- [00:34:10.550]What the couple of the new players
- [00:34:12.970]and think about the risks involved
- [00:34:15.070]in this strategy of pulling them together.
- [00:34:19.550]What's at risk here?
- [00:34:21.130]I mean, okay, what happened?
- [00:34:23.110]Well, what if I never get a sale
- [00:34:24.930]of these futures off at 4.10?
- [00:34:27.510]That happened last year, 2000.
- [00:34:29.700]We never even really got close to it.
- [00:34:33.100]Until the harvest of this year.
- [00:34:36.880]And then of course, there's always that drought scenario
- [00:34:40.150]and those few years, when the carry disappears
- [00:34:43.820]I'm gonna introduce, of course I can't talk
- [00:34:46.430]about anything without having a character.
- [00:34:49.400]I'm gonna introduce two new characters to help us look
- [00:34:52.620]at the history here.
- [00:34:54.930]Here's Tammy Twostep.
- [00:34:57.090]She embraces marketing start to finish.
- [00:34:59.650]This is what Tammy is.
- [00:35:01.880]Tammy does exactly what Tilly does
- [00:35:04.300]before harvest 20% sales March, April, May
- [00:35:08.410]June hedges that 80%
- [00:35:13.260]following Earl after harvest
- [00:35:15.670]which means usually she's selling the carry
- [00:35:18.320]after harvesting corn.
- [00:35:20.000]Sometimes she's holding unpriced grain.
- [00:35:23.290]She pays variable storage costs and 20%
- [00:35:27.440]of her grain is priced at Barney harvest price.
- [00:35:30.910]And now you got our brother, Tommy
- [00:35:33.460]and Tommy is also following two characters only
- [00:35:40.770]before harvest Tommy follows Buck.
- [00:35:43.580]Remember Buck he's buying, put options, not selling futures
- [00:35:48.050]after harvest, just like just like Tammy.
- [00:35:51.330]He follows her.
- [00:35:55.030]This is Iowa Average Corn Prices.
- [00:35:57.690]31 years of data.
- [00:36:00.170]Barney is average $2 and 89 cents cash price
- [00:36:03.990]of corn at harvest.
- [00:36:05.470]Tammy has average 32 cents
- [00:36:09.180]a bushel better on every bushel
- [00:36:11.760]of corn produced over a 31 year period.
- [00:36:16.900]She has beaten Barney 90% of the time, 28 of 31 years.
- [00:36:24.800]And she has beaten Barney by more than 10%
- [00:36:28.270]in two outta three years, 20 years
- [00:36:30.890]Barney's had his moments.
- [00:36:33.520]Those three years, Barney beat Tammy.
- [00:36:36.550]It was by more than 10%.
- [00:36:38.730]Now, look at Tommy with options.
- [00:36:42.100]Even he is beating Barney by 21, 22 cents a bushel
- [00:36:48.540]and beating Bernie 8 out of 10 years.
- [00:36:56.300]This is again data.
- [00:36:57.880]And remember 20% of their price is based
- [00:37:01.160]on Barney's harvest price.
- [00:37:02.880]And they do have storage costs.
- [00:37:06.810]I just took 30 years and looked at everyone the years.
- [00:37:11.540]And as we get short on time, I haven't got time to dwell
- [00:37:15.370]on this.
- [00:37:16.203]But when I do at the workshop,
- [00:37:19.560]which is how to get $4 corn,
- [00:37:23.970]we go through this quite a bit
- [00:37:25.890]and we're looking at Tammy's best year as well at tip
- [00:37:29.870]to Barney.
- [00:37:30.830]These are the top 10 years,
- [00:37:33.080]and Tammy is beating Barney,
- [00:37:35.110]not by 10%.
- [00:37:37.590]She doesn't have a 10% advantage.
- [00:37:40.140]She has a 25 to 50% price advantage over Barney.
- [00:37:45.110]Now these are the best of best years
- [00:37:47.650]and the most recent one being 2014,
- [00:37:52.690]just six years ago.
- [00:37:54.500]And what you'll find in common in these great years
- [00:37:57.610]usually Tammy got a great start
- [00:38:02.920]with pre-harvest marketing.
- [00:38:06.340]And most of those years were a large carry year.
- [00:38:11.130]And, she added,
- [00:38:17.050]Tammy benefited from pre and post harvest marketing
- [00:38:22.030]in two out of three years, not just one
- [00:38:24.510]or the other, but both of them in 22, 30 years, by the way
- [00:38:28.720]here's our middle 10 years.
- [00:38:30.760]This is the middle of the road.
- [00:38:33.390]Tammy is beating Bernie 12 to 20% over here on the right.
- [00:38:38.810]Again, this is what her pre-harvest marketing added
- [00:38:42.920]to her efforts.
- [00:38:44.250]This is what her post-harvest marketing
- [00:38:46.400]added to her efforts.
- [00:38:54.450]If you look at my data closely,
- [00:38:58.850]I've called this how to get $4 corn.
- [00:39:01.180]And you're gonna look at the recent years
- [00:39:03.610]and you're gonna say, well, Tammy didn't get $4 corn.
- [00:39:06.780]Well, let me explain why Tammy did not.
- [00:39:09.440]In my initial example
- [00:39:13.350]of how to get $4 corn.
- [00:39:14.980]Did I not blissfully ignore storage costs?
- [00:39:18.560]Yes, I did.
- [00:39:19.440]I didn't talk about storage costs.
- [00:39:21.960]I won't let my players do that.
- [00:39:24.260]If Tammy paid storage costs that averaged
- [00:39:27.390]over that time period, roughly about 17 cents.
- [00:39:32.200]My initial example did not take into account
- [00:39:39.540]that most producers have to sell something at harvest
- [00:39:42.980]at 20% higher, the sale that too cost another 10 cents
- [00:39:48.010]and Tammy made sales in the spring,
- [00:39:52.480]regardless of whether it got the 4.10 or not
- [00:39:56.370]and that cost of 9 to 13 cents on average.
- [00:40:00.040]And that accounts for why the numbers are at $4 of better
- [00:40:04.630]but these are an add up storage costs.
- [00:40:06.360]These are very realistic looks
- [00:40:09.930]at her performance in these years.
- [00:40:13.540]Here's our bottom 10 years
- [00:40:15.710]and I have not accounted for the last year yet.
- [00:40:19.510]It's not gonna be in the bottom
- [00:40:21.080]but it's not gonna be very good either.
- [00:40:23.180]It's gonna be in these bottom 10.
- [00:40:27.450]I think she'll end up better than Barney
- [00:40:31.180]but I have to take a look at that.
- [00:40:33.160]Look at the three years, the only three years
- [00:40:35.660]where Tammy had had a tough time, 2002, 2010, 2012
- [00:40:42.915]2012 was a drought year.
- [00:40:47.290]And lack of carry is a challenge.
- [00:40:53.140]My data doesn't speak well of Uncle Buck.
- [00:40:57.040]We've already showed that before harvest Uncle Buck is yeah,
- [00:41:01.990]options are costing him money before harvest.
- [00:41:07.160]Why would we buy, put options?
- [00:41:09.100]If they seem to cost money over time
- [00:41:12.550]I'm pulling a quote out
- [00:41:14.010]from a mud market advisor a few years back who noted
- [00:41:18.770]in a letter to his subscribers, "I have become more
- [00:41:22.170]and more disillusioned with the results
- [00:41:24.190]when I use puts.
- [00:41:25.260]In three of the four years
- [00:41:26.440]by new crop puts has been a waste of money."
- [00:41:30.400]When did he send this out?
- [00:41:32.530]He sent it out in May of 2012
- [00:41:36.040]which would end up being the drought year
- [00:41:38.380]and the one year you needed those points.
- [00:41:43.040]In other words, people
- [00:41:45.220]I'm not trying to sell you on the idea
- [00:41:47.770]that you must be Tammy and that Buck there's value in both.
- [00:41:53.490]And it's still okay to spread out your marketing decisions.
- [00:41:58.200]Marketing is not easy.
- [00:42:00.830]Nothing is 100% here.
- [00:42:03.040]An approach that works overtime is not to be confused
- [00:42:06.470]with the guarantee that it'll work every time
- [00:42:09.210]as 2020 has showed us.
- [00:42:13.180]That's how you get $4 corn
- [00:42:14.900]but you can plug in your November futures
- [00:42:19.080]which are currently 10.50 or better think about a basis.
- [00:42:24.010]The challenge with the soybeans
- [00:42:26.830]is this selling the carry.
- [00:42:29.100]You're probably gonna end up holding unpriced
- [00:42:31.700]soybeans after harvest.
- [00:42:33.230]There's going to be more risk.
- [00:42:35.090]The payoff is there
- [00:42:36.180]but there's gonna be a riskier profile.
- [00:42:42.000]I put this hair.
- [00:42:42.960]Maybe you wanna go through the math for your own farm.
- [00:42:47.200]This how to get $4 corn starts early.
- [00:42:49.750]It starts before harvest.
- [00:42:51.440]Spring is often a timely place to start.
- [00:42:54.180]It showed one this last year, but that was last year
- [00:42:59.210]use tools that anticipate storage Hedge-to-Arrive forward
- [00:43:04.440]contracts are put options.
- [00:43:06.480]Roll the hedge forward
- [00:43:08.890]as you get close to harvest
- [00:43:10.490]and wait for that spread to widen now
- [00:43:12.610]and then pay attention to basis to close out the deal.
- [00:43:21.790]Okay, Keith, that ends my first talk.
- [00:43:25.430]And I'll come back in a few minutes
- [00:43:28.600]with how to write a pre-harvest marketing plan.
- [00:43:32.350]Okay Ed, there was a question in the chat box.
- [00:43:36.130]You wish to address that now or later?
- [00:43:40.140]Let's take a look at it.
- [00:43:42.650]The question is what percent
- [00:43:44.870]of crop does Buck protect with puts?
- [00:43:47.450]And the second part of the question
- [00:43:48.890]is does Buck roll puts up or down?
- [00:43:53.370]He protects 80% of his crop.
- [00:43:55.911]20% in March, April, May
- [00:44:00.370]and June over four months, just like Tilly, 80%.
- [00:44:04.340]He does not roll them up or down.
- [00:44:06.190]He simply buy some in the spring
- [00:44:10.555]and gets out of them at harvest, sells the puts
- [00:44:15.040]at harvest and then follows that roll with data
- [00:44:18.930]run price corn in the band or selling that carrier.
- [00:44:24.040]Okay, thank you, Ed.
- [00:44:27.420]Very good.
- [00:44:28.253]I appreciate that very much.
- [00:44:29.950]Ed's gonna be back here about 10 minutes.
- [00:44:32.050]We're gonna take a break and Ed's gonna talk
- [00:44:34.500]about how to write a pre-harvest marketing plan
- [00:44:38.310]and the background.
- [00:44:39.600]You should see a large field of soybeans.
- [00:44:42.900]And if you'll know, there's no mountains, there's no trees.
- [00:44:47.900]So my question to you is where might this be?
- [00:44:51.120]Now soybeans are grown worldwide.
- [00:44:53.710]So I'm putting the chat box your best guess
- [00:44:56.590]on where this soybean field is.
- [00:44:58.960]And we'll answer that question.
- [00:45:00.500]When we come back from the break.
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