July 13, 2022
From the start of spring, 2022 has been a challenging year. From a later-than-normal start for most growers in the Corn Belt to spotty rainfall, the ranges in yield expectations for this growing season are all over the board.
Throw in plenty of heat at times with a forecast of hot and dry through the second half of July into August and it makes for a challenging environment to market our crops. I’ll dive into how we might handle these two situations given the risk of making a mistake is robust.
When drought strikes
First of all, let’s talk about the growers who have a yard that is more brown than green. If you continue to miss the big rains, I feel for you. It’s no fun seeing rain get to the edge of your county, break up and then re-form somewhere on the other side. While I’ve been lucky on most of our farms this year, I have clients not 30 miles away who can’t buy a rain.
If you’re in this situation, making physical sales is not only hard to process but it’s risky. Given the wild swings in the market, producers who have been oversold in the past certainly don’t want to make that mistake again.
For instance, many growers had just half of their crop hedged in a year like 2012 – and with average prices at $5 or even $6, it felt great. But it didn’t rain. When corn went to $8, some of those who sold 50% and raised 40% had to buy back those bushels. This is what you call the no-fun zone.
So, what does a producer do when markets offer big profit margins but they don’t want to make physical sales? For those who buy crop insurance, there is some reassurance that if we have a yield less-than-APH, we have solid protection. But, taking advantage of high prices – much above the $5.90 spring price – is something we’ve encouraged all spring and summer.
Simply buying a put option may seem expensive, but if our break-even price is significantly below the market, an affordable put safely above it is a great investment. In fact, given years like 2008 when December corn plummeted over $4 after pollination, I’d hope we understand the need for this protection.
Update yield estimates
Now, let’s talk about the lucky suckers who’ve received adequate rainfall. While it’s too early to say there are record yields out there, the table is set for some of those producers who are in this boat. A couple of things we should consider doing are keeping our likely yields and sales updated as we look at profitability, and also increasing our sales/hedges.
The www.AgMarket.App is similar to other products in that it calculates break-even through the year. We use this tool daily with the growers we’re assisting. I encourage producers to update yields as well as the prices they market at as they go through the season.
For example, let’s say a producer predicting 200 bushel per acre corn for this season with a break-even of $5/bu. They have ample rainfall and update their yield to 225 bpa. Simply by increasing the yield, their break-even moves down to $4.55. If you also log the sales you’ve already made, likely well above these levels, it moves your break-even lower yet. Keep your yields up-to-date.
As far as risk management in concerned, I like increasing coverage as our projected yield increases. However, this doesn’t necessarily mean making more physical sales.
For those who have experienced a late-season wind or hail-storm, you know what I’m talking about. While I’m ok with 40% of projected yields being locked in on a physical basis, that’s about as far as I want to go. So, increasing coverage would be accomplished through placing floors under the market. As with the earlier example, I want to look at my break-even and realize just how much profit I can lock in by setting a floor well above that break-even.
For those who are expecting big yields – if you have them plugged into your calculator – your ability to lock in big revenue in 2022 is certainly present.
I hope Mother Nature treats you right the rest of this summer.
Feel free to reach out to me or anyone on the AgMarket team. We’d love to hear from you.
Reach Matt Bennett at 815-665-0462 or [email protected].
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