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Grains: Basis Blues and Carry Clues · Professional Ag Marketing Podcast

0:01
SPEAKER_01: Welcome to the Professional Ag Marketing Podcast.
0:04
SPEAKER_01: If you want a deep dive into the ag markets and risk management strategies, your search is over.
0:10
SPEAKER_01: Come here after every Friday to get your weekly commodity recap.
0:14
SPEAKER_01: Trading commodity futures and options involve substantial risk of loss and is not suitable for all investors.
0:21
SPEAKER_01: This is your host, Mike Minor.
0:22
SPEAKER_01: Let's get started.
0:23
SPEAKER_01: Today is July 25th.
0:25
SPEAKER_01: I've got Jaden with us here today.
0:26
SPEAKER_01: How's it going, Jaden?
0:27
SPEAKER_00: It's going good, Mike.
0:28
SPEAKER_00: How about yourself?
0:29
SPEAKER_01: Very good.
0:30
SPEAKER_01: Well, I thought it was a very, very relevant podcast to have you and I chat today just about this grain market.
0:35
SPEAKER_01: And you and I are really kind of the point guards now at professional ag marketing on this grain side of managing risk.
0:42
SPEAKER_01: So I want to talk about four main things today.
0:44
SPEAKER_01: We got a big crop coming at us.
0:46
SPEAKER_01: We have basis, we've got options that I want to look at, and then I want to talk about the carry today.
0:50
SPEAKER_01: So let's dive into this big crop, Jaden.
0:53
SPEAKER_01: What are you hearing from crop prospects across the country?
0:57
SPEAKER_00: Well, Mike, uh there's there's nothing really to complain about, is kind of what I'm hearing.
1:01
SPEAKER_00: I mean, adequate rainfall, good heat, and I mean those are kind of the important things for the corn crop.
1:07
SPEAKER_00: Uh we need moisture in July and heat in July.
1:10
SPEAKER_01: I've had like 15 people tell me a crops never looked this good this morning in their area.
1:15
SPEAKER_01: And that's everywhere, basically.
1:17
SPEAKER_01: I know there's some small areas uh that have received too much rain or kind of missing out.
1:22
SPEAKER_01: So uh there are very, very small pockets here or there.
1:25
SPEAKER_01: But in general, for most of the corn belt, we have a very big crop coming.
1:29
SPEAKER_01: And with that being said, it wouldn't be abnormal for us to have an above trend line yield of about 4% in a year like this with the crop condition scores we've had.
1:40
SPEAKER_01: So these outlandish, you know, 190 type average corn yields maybe don't look as crazy uh as one would think.
1:47
SPEAKER_01: Well, Mike, that's 10 above, you know, 11 above our record that we uh achieved this last year.
1:52
SPEAKER_01: How could that be?
1:53
SPEAKER_01: You gotta remember we posted a 183.5 uh yield on the WASDA report last fall until it didn't rain after basically today the rest of the year.
2:01
SPEAKER_01: So without that dry down last year at the end, what was yield potential last year?
2:06
SPEAKER_01: And a lot of folks are thinking that 183 type area.
2:09
SPEAKER_01: So, yes, uh maybe we do have an opportunity to have a mid-180s yield this year.
2:14
SPEAKER_01: We'll see a lot of the growing seasons left, but it sure seems like both the market and elevators are treating this like the grain is already in the bin.
2:23
SPEAKER_01: So I'm gonna bring this up.
2:25
SPEAKER_01: So basis is a huge opportunity right now.
2:28
SPEAKER_01: What are you seeing on new crop basis levels, Jaden?
2:31
SPEAKER_00: Yeah, Mike, I'm seeing some weakening around in this area, especially eastern South Dakota, southwest Minnesota.
2:37
SPEAKER_00: Um, a lot of people seeing, you know, the crop conditions are great, the growing conditions are great, and they're getting worried that they're gonna have a probably more bushels than normal to move at harvest, and and getting setting the basis on that is kind of key right now.
2:52
SPEAKER_01: That's been really aggressive.
2:54
SPEAKER_01: A lot of folks have been locking in a good chunk of basis for harvest delivery because they're afraid they're gonna have a massive crop, and so is their neighbor and everybody else.
3:02
SPEAKER_01: And this idea, it snowballs, right?
3:04
SPEAKER_01: Because then all of a sudden the the grain merchandisers are calling their guys saying, hey, I'm gonna weaken basis next week because I'm buying so much corn for fall delivery, you should lock it in now.
3:14
SPEAKER_01: And then you kind of peer pressure guys into locking it in anyway.
3:17
SPEAKER_01: So then the the the uh that just snowballs on top of each other.
3:21
SPEAKER_01: But we're really seeing that probably even like five, six cents weaker, week over week for new crop basis levels.
3:27
SPEAKER_01: Eastern South Dakota could be in the 50s here soon for new crop basis levels on corn, negative 50 plus.
3:34
SPEAKER_01: So uh keep an eye on that uh basis, and uh if you have any bushels to move at harvest time, we're really focusing on them for both basis and for a marketing strategy to make sure we're protected at a decent level if we need to be, or it's unprotected at at today, anyways, for harvest delivery.
3:53
SPEAKER_01: So that's something I I wanted to talk about is let's say I'm not protected, Jaden.
3:59
SPEAKER_01: What's something that you would say, well, I got a ton of bushels, I got to deliver at harvest, I haven't done anything yet.
4:04
SPEAKER_01: What are some uh what are some avenues that we've been going towards for trying to manage that risk?
4:10
SPEAKER_00: Yeah, Mike, I really like that May-July time frame.
4:13
SPEAKER_00: Um options are relatively pretty cheap right now.
4:16
SPEAKER_00: I kind of looked at some history here.
4:18
SPEAKER_00: Um last year, uh December 25, March Corn Futures closed at 435 on this day, and it kind of in line with today, we're trading at 435.
4:28
SPEAKER_00: And uh, I was looking at a 430 call and put option uh total premium, and it's about three to four cents um uh more expensive than this year, and that just kind of tells us that the decline in option premium this year kind of reflects uh reduced market volatility, and uh there the traders aren't really seeing a big swing in in corn price.
4:50
SPEAKER_01: So, like if you go to a March option today at the money, you would be probably three cents cheaper than we were last year for that same at-the-money strike option.
5:01
SPEAKER_01: So it it just shows volatility is down a little bit.
5:04
SPEAKER_01: The market doesn't think we're going anywhere fast, whether it's up, down, all the way around.
5:08
SPEAKER_01: It's very comfortable in the low fours, is what the market's telling us.
5:12
SPEAKER_01: So these option values, when I look at them, they seem relatively affordable for a lot of these.
5:18
SPEAKER_01: You don't have to move very far out of the money and find some nice opportunities.
5:22
SPEAKER_01: Um, you know, when I'm looking at a marketing strategy for something in the bin, uh, especially taking advantage of that carry opportunity seems pretty important right now, doesn't it, Jaden?
5:32
SPEAKER_00: Yes, it does, Mike.
5:33
SPEAKER_00: The market's really incentivizing, you know, that carry, and they just see a big crop coming, and I think it's a it's a good good time to reward it.
5:42
SPEAKER_01: Yeah, so if you look, I think uh, you know, we want that extra time value out to May, for example.
5:48
SPEAKER_01: Uh, you're getting a decent carry today.
5:51
SPEAKER_01: Sure, it can go up.
5:52
SPEAKER_01: We just saw them the December to March uh carry their build out to uh just over 17 cents.
5:59
SPEAKER_01: We're about 17 and a quarter today.
6:01
SPEAKER_01: Uh going all the way out to July, for example, I mean we're at 34 cents.
6:05
SPEAKER_01: Sure, we could get that thing out to 45 cents at some point, maybe, but uh locking in something out further there, taking advantage of carry looks pretty decent right now.
6:15
SPEAKER_01: And just from a market perspective, we've got a big crop coming, we think at the moment, and we're pre playing this game where we talk about who's got the biggest yield at this current moment.
6:26
SPEAKER_01: So at some point here, the market's been building in carry, but before harvest, I would expect that this market would try to put a low in.
6:34
SPEAKER_01: Now, normally that's the end of August from a seasonal perspective.
6:37
SPEAKER_01: It'll be interesting to see if we put that low in earlier in the growing season this year because we're expecting such big yields so early in the growing season.
6:46
SPEAKER_01: Because like I said, we got three months left till we get in the field.
6:49
SPEAKER_01: So I'm curious to see what the market's gonna act like here over the next couple weeks and if we do end up trending lower into the end of August like we did last year.
6:59
SPEAKER_01: But if we are putting in a low earlier, that carry is gonna be a good thing to take advantage of at today's market value because there is a pretty big crop, so there's gonna be a pretty good ceiling on this thing.
7:10
SPEAKER_01: It sure looks like uh we're gonna need some supply or trade uh really to help us bust out and have a substantial rally of any standpoint.
7:21
SPEAKER_01: So uh a few things to really focus on there, Jaden.
7:25
SPEAKER_01: But as we wrap up today's podcast, it was a very boring week when it came to news.
7:29
SPEAKER_01: Um we had an opportunity yesterday, the USDA misprinted an export news headline that we had sold corn to China.
7:37
SPEAKER_01: It was really South Korea, so I was surprised that the market wasn't a little bit more disappointed in that news.
7:44
SPEAKER_01: I thought when they came out and said, nope, no, South Korea, I thought we would have sold off a little bit more, so that was surprising uh to me yesterday.
7:51
SPEAKER_01: Uh other than that, you know, we've uh we couldn't quite close out a key reversal uh with this week being a lower trade in these grain markets.
8:00
SPEAKER_01: Uh that would have been really nice to see at least, but December corn here, very comfortable in this 415 to 425 area looks like here.
8:09
SPEAKER_01: We'll see uh uh what traders have going forward as we continue to hear about how pollination's uh right in the middle of it, wrapping up for a lot of these areas and how crop development looks.
8:21
SPEAKER_01: We have heard some pollination problems out there, but it seems very minor.
8:26
SPEAKER_01: Um so please tell us if you're seeing anything abnormal out there other than a lot of fungal diseases with uh the current weather pattern we've had in the Western Corn Belt.
8:36
SPEAKER_01: Uh it seems like we're susceptible to that this year.
8:38
SPEAKER_01: And then anything with pollination problems, anyways, with tight uh tassel wrap or anything along those lines.
8:45
SPEAKER_01: So uh a few interesting things going on, but honestly, uh for the end of July, it was a pretty boring week, anyways, uh, for grain news here, Jaden.
8:54
SPEAKER_01: If you have anything else that you want help managing on your operation, you know, we're going into this equity preservation mode, it sure feels like in these grain markets.
9:03
SPEAKER_01: Uh please give us a call on helping manage things like basis and managing carry and and managing your space like an elevator and really milking it for all it's worth.
9:14
SPEAKER_01: And if you wanted to talk to us about how we can help uh improve your operation in those aspects of risk management, uh please give us a call at Professional Egg Marketing and reach out to uh one of us brokers.
9:25
SPEAKER_01: Thank you for your time, Jaden.
9:26
SPEAKER_01: We'll see you next week.
9:27
SPEAKER_01: And thank you to all our listeners.
9:29
SPEAKER_01: Please reach out to us at professional eggmarketing.com.
9:33
SPEAKER_01: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
9:38
SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
9:44
SPEAKER_01: See you next time.