How did December corn futures evaporate so fast? They are $1.80 less than the end of August and keep fading. July corn futures bottomed in Oct at $6 rose 80¢ and has just about lost all of that. Cash corn in Riceville, Iowa is 38¢ under and tens of thousands of farmers have full grain bins with the doors rusted shut. They know that commodity prices are being driven by the European debt crisis and the lack of market speculators, but how can you reasonably market corn that is only worth $5.60 when it was $2 higher than that just a few weeks ago?

During the latter half of October and first half of November, corn futures were headed sideways, with very little net movement up or down. But the trend is now headed down and 50¢ has been lost in the past couple weeks. There are some concerns shared by a lot of farmers, since a cash rent payment will soon be due, and taxes will have to be paid in several months on a big income year. Based on recent price moves, it will take 30% more corn to pay those bills than just 3 months ago.

The answer man suggests working the basis and the futures carry to make old crop sales. That is Steven Johnson, Iowa State University economist, who said the November Crop Report indicates fewer bushels available, but demand was lower, because supply was lower, but demand was declining, and there was nowhere to stop the trend that was feeding on itself. Despite less than stellar export expectations, the corn basis is strong according to Johnson. And he calculated a week ago that the basis was at record high levels, because of strong demand, slow movement of corn, and the reluctance of farmers to sell at low levels. While speculators are not willing to drive up futures prices, cash corn buyers are willing to pay more to fill their hand to mouth needs.

Johnson says most farmers don’t want to sell a lot of corn and add more to 2011 income, so a minimal flow of corn will be in the pipeline until early in 2012. But he says the basis should remain healthy due to the demand for corn by ethanol plants which will buy 5 billion bushels this marketing year. He says farmers with a hedge to arrive contract, which has the basis element still open, will notice there is a firm basis and lack of carry in corn futures. If the contract is nearing the delivery time, and you want to capture an even stronger basis, he suggests calculating the cost to roll it forward to a later delivery month. That will help shift income into 2012, but talk to your elevator manager well in advance of the delivery time to allow him or her to adjust the necessary hedging on the Board of Trade.

Johnson says there is minimal carry for old crop corn contracts, which he says has been floating between 18 and 23¢. That means there is current strength for nearby delivery, and demand weakness as the 2012 crop maturity would be approaching. He suggests farm-stored corn could still be profitably sold for deliver in spring 2012, but that might not be the case for elevator-stored corn. If you do not want to unload commercially stored corn because of the lower value currently, Johnson suggests replacing the cash grain with a call option that would increase in value if you think prices will rise. That can be accomplished yourself, or for a few cents more, the elevator will help you with a minimum price contract that is the same thing.

If you opt for the minimum price option strategy, Johnson suggests using the July futures contract. That contract is 6 months away from expiration, and the time value is expensive. But he says that contract will be most likely to react favorably, should there be any spring planting threats or threats to pollination. He says you want to liquidate the option if and when its value has increased more than the price that you paid for it. That calls for close communication with your grain merchandiser at the elevator.

Summary:

Corn futures are disappointingly low because of the lack of speculators in the market, but there is still money that can be made by selling corn based on the use of basis and market carry. Current demand for cash corn is strong, helped by feedlots and ethanol plants. But the market carry is weak into distant contract signaling more money will be made with nearby sales than distant dales with higher storage costs.