1. What is a Spread? Spreads are the difference between two futures months on a specific trading day.

2. Why are spreads important? Futures market spreads indicate how much traders expect cash prices to rise (or fall) in the coming months. Usually, if prices are at historical highs, traders expect prices will decline as the short supply is allocated to limited buyers, and thus spreads become INVERTED, meaning the further out you go, the lower futures prices are. Inverted futures markets present a great opportunity to sell cash grain and buy back a discounted, distant futures month with a call option (same as a minimum price contract at your elevator) or futures contract (same as a basis fix contract at your elevator). You effectively own the grain on paper at a much lower cost than owning the physical commodity, and thus incurring storage costs.

However, more typically spreads are positive, and thus this market situation is called a NORMAL spread market. Generally, in a NORMAL spread market, spreads do not exceed the cost of storage. If spreads do exceed the costs of storage, it could be called a STORAGE market, and a storage hedge may be a profitable option.

3. How do I use spreads in my marketing plan? Spreads often can indicate HOW to best own grain. "Should I sell cash grain and buy a call? Or should I store cash grain and buy a put?" Risk is nearly the same in both cases, but the best method depends upon spreads and expected basis movement. In an inverted spread market, the best strategy is to sell the cash grain, and buy a call. In a storage spread market, the best strategy is to store the cash grain and buy a put (for on-farm stored grain).

4. Calculating Returns to Storage - By combining basis with current futures spreads, you can calculate the expected returns to storage if you know your storage costs. In order to guarantee those returns to storage, however, you must execute a futures hedge or buy a put (to execute a minimum price contract). Generally, returns to storage 2-3 months after harvest are negative for elevator stored grain due to the high cost of elevator storage (3c/bu/month). This is why we typically recommend selling all elevator stored grain within 3 months of harvest. For on-farm stored grain, 90% of the time its advantageous to have it sold within 1-2 months of the next harvest (maximum storage = 10-11 months).  Click on the links below for more information on calculating Returns to Storage.

Storage Carrying Costs Viewer - click here to view a spreadsheet where storage costs are calculated.

Storage Carrying Costs Calculator Spreadsheet - click here to download a spreadsheet to calculate your own storage costs.

Returns to Storage Viewer (PDF file) - click here to exhibit a returns to storage calculation by Progressive Ag.

Returns to Storage Spreadsheet Calculator - click here to download a spreadsheet to calculate estimated returns to storage.

How to use spreadsheets to calculate Storage Costs and Returns to Storage click here to see how to use the spreadsheets to estimate storage costs or carrying costs.