November 28, 2017
Close Nov 28
1 week change
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+ 1 .33
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Soybeans were a little higher over the past week, while corn and wheat were weaker, with both making new contract lows on the daily charts. However, wheat prices are 47 cents and corn is still 35 cents above the lows hit in Aug., 2016 on the weekly and monthly continuation charts. These latter charts always use the nearest month daily charts for each commodity.
The reason for the marked difference in the appearances of the shorter term daily and longer term charts is because of carry. Grain futures are usually structured where each month further out into the future trades higher than the previous month. This is especially true in large crop years.
It is the way the market rewards farmers who can store their crop. It is also how elevators and grain companies make money on trading grain. Obviously, not all the crop can be used at harvest time. The carry in futures allows producers to sell for deferred shipment at a premium to the current or spot price.
There are obviously risks and costs to storing grain, and carry is how futures compensate for that. There is the risk of the crop going out of condition. Until the grain is shipped, no money changes hands, so obviously producers give up any interest that could be earned by selling their grain sooner.
Unlike equities, each futures contract has a finite life. For example the popular December corn and wheat futures expire Dec. 14. However, in cash grain trade, buyers will not buy grain using Dec futures after the first notice day, which is always the second last business day before the expiring month. (Nov. 29 this year).
What happens before the first notice day, is that the grain trade will move to the next active month for their basis bids. (March, 2018, in this case) As is usual, March futures are higher so the local basis gets decreased by the amount of the carry, so flat prices don’t change by much when they “roll to the next month”.
What happens to the charts when futures expire? The daily charts obviously end after the last trading day. However, the weekly and monthly charts will automatically begin using the next, usually higher priced, futures month, which automatically makes the longer term charts look stronger than they actually are.
If the underlying fundamentals don’t change, prices often drift back down to where the previous month expired. This isn’t a good scenario for producers, because the basis was adjusted down by the carry in futures when it rolled, and prices can go back to the low of the month that just expired.
For producers with on farm storage, “selling the carry”, or selling for deferred shipment, makes sense. That way you avoid the possible circumstances that I just described. Plus you can plan your cash flow better, and take risk off the table at the higher prices offered for later shipment. ♦
- Frank Backx, HDC Grain Marketer