Market Matters Blog
Katie Micik DTN Markets Editor

Tuesday 09/11/12

Buying Out Cash Contracts

A recent DTN 360 Poll showed that nearly 1/3 of farmers in drought areas haven't forward contracted any of their grain. And 42% said they will produce enough grain to fill their forward contracts. The rest are waiting on actual yields and lower prices before buying out of forward contracts they won't be able to fill.

Here's the breakdown of how 405 survey respondents answered the question, "If you are in a drought-affected zone, what best describes how you are handling your forward cash contracts?"

28% Nothing forward priced
42% Will have no issues filling forward contracts
4% Already bought out contracts I can't fill
19% Waiting for actual yields before buying out contracts
6% Waiting until prices drop to buy out contracts
1% Other (please email)

DTN Senior Analyst Darin Newsom said that it's not unusual for 28% of farmers to have no forward contracting. In fact, it implies that 72% of farmers have done some contracting already, which is probably toward the high end of normal.

Of farmers that have already contracted grain, 42% said they have enough grain to fulfill their obligations. That's about 30% of the farmers who forward contracted at least some grain. "This could be a problem, with 58% of those contracted looking at shortages," Newsom said.

Only 4% have already bought out of contracts, meaning 54% of those contracted "could be forced to chase the market, unless we see a technical selloff. Still, the likelihood is that this group will have to buy back well above contracted prices."

Many of these producers likely entered into forward contracts before the price run-up started in June, likely in the $5 to $6 range. That means many producers are underwater on their grain contracts by $2/bushel.

Of the survey respondents, 20% said they're waiting for actual yields before buying back and another 6% are waiting for prices to drop.

That might not be a bad play, Newsom said. "Again, corn and beans are trading in the upper percentages of price distribution ranges, meaning near all-time highs. Noncommercial traders already hold substantial long futures positions and may need to see lower prices before buying more, particularly with market volatility running high at this time. A selloff tends to lower volatility making it more attractive for investment money to move in. Fundamentally, corn and bean spreads are indicating a less bullish outlook short-term due to a slowdown in demand (most notably corn). These factors combined give markets a slightly more bearish structure, meaning producers might be able to take advantage of a short-term selloff in the near future."

Harvest pressure usually hits the market quickly, dropping the corn market over the course of a week or so. From then on the market usually stabilizes before resuming its seasonal uptrend from October to June.

So for the farmers waiting to buy out contracts, watch for a selloff to minimize your losses. It's unlikely corn prices will fall back to $5-$6 price range, but Newsom said the market "could be limited to 50% retracement back to just below $7.00 given weak carry in futures spreads."

Posted at 1:00PM CDT 09/11/12 by Katie Micik
Comments (4)
might get tough to fill all contracts! we harvested a field of corn yesterday, I thought was my best corn. It went around 90 bu. Heard of a few bean yields from our area in the mid teens. It's not looking good. Did not contract any 2013 wheat yet either, not sure if we can even plant it it's so dry.
Posted by Raymond Simpkins at 3:56PM CDT 09/12/12
Tough times? I did not sell aggressively at all (75 bpa), and I am looking at an average of $5.80 at that. I will only get 45-50 bpa, so I figure I am farming for experience this year. No insurance, but CGB hedged, and I will by out their hedge. Fun times!
Posted by Michael Dechy at 11:49AM CDT 09/18/12
In Central MN, hearing corn from 140-170/acre...running 16-18% moisture.....beans hearing 38-57......so looks like not a big issue around this part of the country.
Posted by Steve Larson at 9:47AM CDT 09/19/12
Is it possible to roll these bushels to next year.
Posted by WARREN HARDY at 7:36PM CDT 10/30/12
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