There is a question about whether or not the futures curve for corn futures will be upward sloping for contracts of a few months to a few years, if the storage costs are substantial and are greater than the convenience yield. I said yes. (that’s wrong) The answer is no, because the need to store corn falls at harvest time. Now, I’m no farmer, but I don’t understand this. At harvest time is when you take it out of the ground, and since you have to PUT it somewhere, I would think the need to store it is greatest at harvest time. Any of you folks in the midwest willing to help me out on this one?
i think the key to the answer was that the supply is seasonal, so prices will always fall around harvest time so the curve won’t always be upward sloping. as far as that comment about not needing to store corn around harvest time, i don’t really understand that either.
I second cfasf1, used the same logic for that question.
Yeah, I get the overall premise (i.e. that prices fall as supply grows) but its just that specific corn thing that gets me. i know it won’t be on the exam, but I’m curious now to know why cost of storage goes down at harvest. Maybe I’ll become a farmer and find out.
I think the way to look at it is this. For corn that is harvested that season, the first day after the harvest, it will have one day of storage cost allocated to it because it’s only been stored for that one day. But two days before the harvest, any corn that was stored would have 363 days worth of storage cost included in the pricing. I think its more of an “on average, the storage cost per stored bushel decreases at harvest time” due to the huge influx of new crop? Any comments?
landrybj ( I don’t want to know what this stands for) has it right on the money. The price need to incoporate storage costs. so on harvest day no storage costs are included in the price, and following that the storage cost per unit keeps on increasing
damn farmers, i got this wrong too, being from Chicago i should know better. everything is corn around here…
I didn’t get it until landrybj (I do want to know what this stands for) pointed out the erasure of past storage at Harvest +1 for all corn is considered equal (1 day). Sometimes I ask myself where the CFA will let it end. This is getting a little tangential.
yah, i know about the nickname. It’s my student id from university.
reminds you of good all times
thanks for that explanation landrybj.