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SC Iowa | In previous bull markets, we would see the front month contracts lead the way higher with strong inverses to the new crop December, and even steeper inverses to the following year's values...if memory serves me correctly, when 1996 December futures were peaking at around 3.85 the 1997 contract was in the very low $3 area....
What is going on now is that the market cannot take it's foot off the petal for fear the ethanol industry will just buy the backend futures if the market inverts severely---at least that has been the situation so far when 08/09/10 Dec contracts were nearly perfectly aligned...
Which gives the producer an opportunity not seen before to lock up three years of corn at $4.50-5.00 futures if desired...
Between this, $12 beans, and record volume of corn to handle, the working capital needs can be astronomical for a major grain business....
To be perfectly honest, the industry was always pricing the use of HTA contracts too cheaply, but everyone was chasing business and volume....now, the pendulum is swinging back the other way, and likely too far in the short run, but that is the way it goes in a highly volatile environment...
Another risk factor is "contract performance".....none of us really knows where this corn market could go under adverse weather conditions....the working capital issues aside, there is a higher risk of non-performance when corn goes up $2-3 from the sale price.......that is what cooked the co-ops goose in 1996 when the farmers had their new crop short hedges in the july 96 contract and N/Z inverted to almost $2 on the board.....as daily margins calls built up, the bank of coops begin asking the grain businesses "what is your collateral against this money"........and at that exact point in time, the answer was "a promise to deliver corn in the fall for less than $1 per bushel"....and the cobank said "no mas" to additional funds to finance the margin calls....now, had EVERYONE kept their cool, the situation would have unwound more easily, but this is what happens when things get tight.......and I think this is the kind of situation the grain businesses are trying to avoid----going back to their customers and asking for margin money against these HTA contracts...
Nobody, not a single grain business in the US, is immune from working capital constraints when the numbers get high enough...
The net of it all is that more of you are going to have to "pay to play" if you want to sell 2009 and 2010 corn..
Ray J | |
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Andersons and HTA is bullcrap
