Here at StatFutures, our tools are predicated on the underlying assumption that, as a producer, you are "long the market" as soon as you invest any re...
Market Words of the Week - Long & Short
May 31, 2016
Market Word of the Week – Carry
June 7, 2016
Though it may seem intimidating at times, the commodities market can be quite intuitive to the grain farmer. For example, you probably feel, intuitively, that you are likely to get a lower cash price if you sell your grain at harvest than you would get if you could wait a few months. You know this as simple supply and demand – if all farmers around you are selling at the same time, supply probably outweighs demand, and the price is lower. The value you get for harvesting later, or storing for a few months before selling, is carry.
Carry is the amount per bushel that the market pays the producer or person with a long position to hold the grain to a future date.
Thinking about this in the market terms we have learned thus far, you are comparing the price on the nearby to the futures price. The difference between the two would be the carry. If the difference is positive, it may be worth taking advantage of the carry. However, you must take into account costs (or risks) of storing the grain or harvesting at a later time. If costs of storage are less than the carry, you may be able to take advantage of the carry value.
Remember, though, that whenever you have unsold grain inventory, you are inherently long the market and exposed to price risk. Yes, the market may react the way you expect, with a lower price in September and higher price in March, for example. But, it may also invert and deliver a lower price later in the year.
Carrying Unhedged is full exposure, up or down, to the market condition.
The risk of looking to take advantage of the carry is that the market inverts. You can balance this risk by hedging against your long position. Our Hedge My Farm market optimization tool works to take advantage of the potential carry while protecting your downside risk, and, in conjunction with advice from your broker or other trusted adviser, can be a useful tool in your risk management toolbox.
This presentation from the Iowa Commodity Challenge series brings together the concepts of basis and carry.