ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

The price difference between futures contracts Compare the carry offered by the market to the costs of storing grain from one delivery month to the next. Carry (or Spread)

July $5.19 May $5.17 Mar $5.12 Dec $5.05 Corn Futures Carry Date: 4/1/14

July $11.97 May $11.88 Mar $11.79 Jan $11.63 Soybean Futures Carry Date: 4/1/14

July $6.34 July $6.53 Corn Futures Carry Date: 11/17/11 May $6.30 Date: 4/3/12 May $6.58

When further out futures are priced at a discount to nearby futures Usually occurs when demand is strong and the need for the crop is immediate Can also occur during short crop situations or when there is a large crop coming in after a tight stock situation Basis is usually stronger in an inverse market Inverse Carry

Corn Futures Carry Date: 4/12/13 May $6.58 July $6.41 Sept $5.77

Soybean Futures Carry Date: 4/12/13 May $14.13 July $13.79 Aug $13.39

Carry shows the additional revenue that can be obtained from holding on to the crop But there are costs to holding on: storage interest/opportunity costs These are known as the cost of ownership If the carry more than covers the cost of ownership, then it’s referred to as “full carry” Cost of Ownership

Typically, storage costs can be broken down into two categories An in-out charge: sort of like a flat upfront fee Periodic charge: the additional cost for each time period - Could be monthly, weekly, or daily Charges vary by location (on-farm vs. off-farm) Storage

Costs associated with the lost opportunities you could have had if you sold the grain at harvest and reinvested the proceeds Figured as: Cash price at harvest * Short term interest rate * Months in storage / 12 Or the opportunity cost for each month in storage is: (1/12)* Cash price at harvest * Interest rate Interest/Opportunity Costs

Corn Cost of Ownership Assumption: Corn is Valued at $6/bu. - 4% APR Storing monthly beyond harvest costs 3¢ to 6¢ per bushel

Soybean Cost of Ownership Assumption: Soybeans are Valued at $12/bu. - 4% APR Storing monthly beyond harvest costs 4¢ to 6¢ per bushel

Moisture levels and drying costs Shrink factor Transportation costs Quality issues Helpful tool to evaluate costs: Other Factors

Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data

Iowa Storage Capacity Source: USDA-NASS

U.S. Storage Capacity Source: USDA-NASS

Storage Issues Source: Hurburgh and Elmore, ICM News, 10/15/09

Class web site: Spring2014/ Have a great weekend.