Most merchandisers don’t enjoy trading markets with small carries and/or inverted spreads, but by all appearances, that is what the market is going to give us to trade again for the 2022-23 merchandising season.
Here are a few key principles to keep in mind as you navigate this environment.
The higher basis is during harvest, the less room it has to improve after harvest. Strong basis during harvest is essentially some or all of the postharvest “pop” happening earlier than usual. This tends to limit how much more the basis can or needs to climb after harvest – it has already started doing some of the work.
The numbers that nervous buyers pay very early in the season are often some of the best seen for that season. The same things that cause high basis during harvest also prompt users to manage risk and guarantee supply early in the season. The numbers they are willing to pay to do that are often higher early on than they are later in the season.
Volatility in basis, spreads, and price is to be expected. Being right means holding your margins and working capital together, not outguessing the market. When values change every day or many times a day, it’s harder to stay disciplined. This is also when discipline is the most important. Stay hedged up, lock in margins, and move on.
Spreads that are inverted after the crop is harvested do not tend to become carries. Anything is possible, but not everything is equally likely. When supply/demand is such that spreads are inverted once the crop is in the bin, and many of the unknowns are known, spreads most certainly can move around a lot, but they are not likely to build significant carries. Act accordingly.
Panic is not a good motive for doing anything. Flat and inverted spread markets are typically volatile markets and extremely so at times. There may be times when a quick reaction to a market move seems like the right idea. This is not often true. The best way to avoid panic decisions is to make as many as possible outside of the spot market.