Newsom on the Market

"Hit or Stay?"

Mid-autumn brings the age-old questions of hold 'em or fold 'em? Hit or stay? (DTN photo)

The calendar shows we are roughly halfway through October -- or at least we will be next week -- meaning fall corn and soybean harvest is also nearing the halfway mark. That being the case, storage capacity is starting to tighten, raising the age-old question: Which crop to hold and which to sell? Or as one emailer asked, "Do I hit or stay?"

It's a tough question every season and one that requires us to look at all the information available as to which cash crop may be more bullish, which one more bearish as fall turns to winter, winter to fall, and so on. While part of the answer could be supplied later this morning when USDA releases its October round of Crop Production and Supply and Demand estimates, there is more than government guesses to base our decisions on.

First, should cash corn or soybeans be sold across the scales this harvest?

To best evaluate this question, let's familiarize ourselves with the two components of a cash price: futures price and basis. Equally important, both have strong seasonal tendencies that influence cash price patterns.

Recently, DTN has discussed seasonality in a number of different pieces including last week's Newsom on the Market column, "Hope is a Four-Letter Word." Seasonal patterns are simply how markets move over the course of a calendar or marketing year, studied over a set period of time. I usually use five years or 10 years, though others are fond of 20 years to 40 years.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

Looking at DTN's seasonal studies of futures markets (available on DTN Pro systems), we see both corn and soybeans post low weekly closes the first week of October, i.e. last Friday's close. In the case of corn, the nearby futures contract gains an average of about 18% through the close the second week of June. However, we have to account for the normal carry of the market's forward curve (price relationship where each deferred contract is higher priced than the one before). To remove the price difference between futures contracts, we can look at the seasonality patterns of the DTN National Corn Index (NCI.X, national average cash price). As discussed in last week's piece, the NCI.X tends to rally 21% over that same timeframe.

That's interesting, isn't it? Cash corn prices tend to outpace futures prices, even with carry in the forward curve. What does that tell us about expected basis? As with corn futures, basis tends to hit its weakest point when calculated at the end of the first week of October, the five-year average being 31 cents under and the 10-year 30 cents under. Basis strength tends to last through the third week of July with the five-year average peaking at 19 cents under and the 10-year 18 cents under.

It's a similar situation in soybeans where again both futures and basis, and therefore cash (DTN National Soybean Index, NSI.X, national average cash price), tend to post a low with the first weekly close of October. From there the futures price tends to increase 11% through the first week of May while the NSI.X rallies 18% through the third week of July. As with corn, this implies solid strengthening of basis through at least midsummer. The first week of October shows national average basis tends to be about 60 cents under, with the close the third week of July showing basis averaging roughly 7 cents over (five-year averages used).

How do we use this information? There is no right answer, no sure-fire winning hand. It depends on one's risk tolerance and storage abilities. How one reads the futures spreads also plays a part in the final decision.

As stated above, futures spreads are the price difference between futures contracts. The stronger the carry, the more attractive the strategy is to hedge into a deferred contract and hold for basis appreciation. Conversely, a market with a weak carry says the market is pushing prices to secure supplies.

And as the old saying goes, follow the market's lead. If one has to sell a crop, the weak carry in the soybean forward curve is indicating it needs supplies more than the stronger carry in corn. Go back to the discussion on seasonality in both the NCI.X and NSI.X (and last week's column, if you have the time). Again, cash corn tends to gain 21% in price over a span of 37 weeks while the national average cash soybean price gains "only" 18% over a 42-week timespan.

One also has to factor in the distance to, and annual basis moves of, the nearest crushing (soybeans) or ethanol (corn) facility. It's quite possible that one or both of these have a time of year when supplies begin to tighten and basis firms more than what shows up on DTN's national average calculations.

The bottom line is this: Futures and basis for both markets (corn and soybeans) tend to strengthen from this point forward. As farmers have always known, mid-harvest is usually the worst time of year to sell anything. But if sales must be made, and the decision on what to store finalized, one needs to be familiar with the seasonal patterns of all the moving parts involved in the cash market.

Darin Newsom can be reached at darin.newsom@dtn.com

Follow him on Twitter @DarinNewsom

(CZ/AG)

P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]
P[R1] D[300x250] M[300x250] OOP[F] ADUNIT[] T[]
P[R2] D[300x250] M[320x50] OOP[F] ADUNIT[] T[]
DIM[1x3] LBL[] SEL[] IDX[] TMPL[standalone] T[]
P[R3] D[300x250] M[0x0] OOP[F] ADUNIT[] T[]