But in 2009, although the corn carry-in was a hefty 13.9% only a 20-year record low 6% of the corn crop was cut before October. The Sept09/Dec09 corn spread was a generous 13¢ carry in June, but narrowed to only 5¢ by August.
The past does not guarantee what will occur in the future, and it’s risky to draw conclusions from a handful of crop years. But some broad points about Sept/Dec spreads deserve mention:
- Sept corn futures are largely a new-crop month unless harvest comes slowly.
- Late planting or a slow start to harvest may have more impact on Sept/Dec than the size of the beginning stocks.
This summer the corn pipeline is nearly depleted, and late planting raises fears of another slow start to harvest. Sept’13 corn futures are trading more like an old-crop month, at nearly a 40¢ inverse to Dec futures in mid-July. But in the end, any commercial that wants to take delivery of Sept futures in order to get physical corn likely won’t receive it until late September. This feature of the delivery system is why it’s common—but not guaranteed—for Sept futures to lose most of any premium over Dec futures during September.
But a more important corn spread to most merchandisers is the Dec/March spread. Fall is when firms typically own the largest volume of corn, and managers need a generous Dec/March carry to cover the cost of holding hedged inventory. There’s a strong seasonality (well beyond the few years shown here) for this spread to trade to its highest carry during the fall. As a result, merchandisers often wait to roll short hedges forward until October or November. But that strategy isn’t fool-proof and caution is warranted!
In 1996 the record tight carry-in, plus prospects for tight ending stocks again in 1997, ran headlong into a harvest that was 20% behind average in October. And Dec’96 futures had fallen steadily from spring to below $2.70 by fall after farmers had seen $5+ old-crop futures just four months earlier. Farm marketings were below average that fall, which also contributed to the Dec’96/March’97 carry narrowing during harvest and inverting by First Notice Day.
Much has changed since 1996; over 200 ethanol plants dot the landscape, using 4 to 5 billion bushels of corn each year. Close to 2 billion bushels of on-farm storage has been built since then. But there are also eerie similarities. The corn pipeline is running dry again, planting was slow this spring, and the odds for an early harvest look dim. With record high basis and futures inverses, new-crop cash corn is worth nearly $2.50 less than summer ’13 values, and new-crop contracting is minimal in most regions. Recharging the “pipeline” will take time and buyers will be competing aggressively for early bushels.
The Dec13/March14 corn spread is currently a fairly generous 69% of Financial Full Carry. You might get a little more by waiting to set this carry (80% would = 14¼¢). But this spread is an important part of the return for holding corn, and good opportunities can vanish. Perhaps this bird in the hand is worth two in the bush.
Hypothetical performance results have certain inherent limitations, and do not represent actual trading. Past results are not indicative of futures outcomes. Trading futures involves risk of loss.