Corn has a similar story. A lot of corn won’t make export quality, and in some cases isn’t good enough for feed operations. Elevators look at current basis values, values for deferred slots, and at the futures carries. They see cash carries of 30 or more for six months down the road in some markets, well after 2010 crop corn has been harvested. Most of that carry comes from the futures spread, July10/December10 CBT corn futures show about 29-30 carry. Imagine, merchandisers can sell basis for harvest or perhaps January 2011, earn 30 or more, and blend lower quality old-corn with new-crop. That’s a lot of potential revenue.
Wide futures carries are indeed sending signals to warehousemen to buy and hold wheat and corn, with the added prospect of raising quality by blending with better quality new-crop stocks.
Other merchandisers have focused on what volume of “good” corn or wheat it will take to blend off their bad stocks. Some have been aggressive, bidding above competition for new-crop to ensure sufficient inventory for blending later. Spreadsheets can help calculate just what quantities they need.
Charts and spreadsheets show that owning hedged wheat is the logical use of space, and owning hedged corn should at least turn out OK (if there are blending gains to be earned). Market letters and comments these days talk about the global surplus of wheat and how the United States is becoming the residual warehouse to the world, paid to carry unwanted wheat. Everyone’s bombarded with market signals. This is where “CS” needs to weigh in.
Don’t count your chickens
Going into harvest with large quantities of off-grade wheat or corn may turn out much different than expected if problems arise with the 2010 crop. That could leave elevators dealing with two problem crops instead of one. And remote as it may seem, there is always the risk that the futures carries could vanish. Then all those carefully projected returns could vanish.
The “CS” decision may still be to carry old-crop grain into new-crop. But CS may tell you to quit counting chickens before they’re hatched. The big and unanswered question in the decision is the cost if the futures carries vanish. What if there is an unexpected wheat crop failure in the former Soviet Union, or Australia? Turning down $1.05 for a 12-month Chicago wheat carry, betting on something closer to $1.70, or turning down 95% of full carry in KC, could suddenly turn into a very costly mistake. As impossible as it may sound, corn spreads could also narrow quickly if the U.S. 2010 crop turns out short, or if China buys enough U.S. corn to sharply reduce ending stocks in 2011.
CS says to lock in excellent futures carries if you plan to hold the hedged inventory, or at least protect the carry on most of the inventory. Use charts and spreadsheets to analyze the numbers, and listen to the market recommendations, but use common sense to add perspective and to frame your decisions.