November 22, 2022
Each marketing year is uniquely unpredictable in its own way. Embracing the unpredictable nature of grain and livestock markets is the first and most crucial step in a lifelong process of becoming a better grain marketer.
As we wrap up fall harvest, ATI Farm Risk Advisors are focused on helping customers make post-harvest marketing decisions for each bushel they’ve produced. We are focused on retaining control while ensuring the farmer has an ideal amount of ownership as well as opportunity on the books until the next crop is established and growing.
Solving marketing challenges
The age-old challenge for farm marketing remains unchanged. Our goal is to help you confidently make the difficult cash marketing decisions you need to make right now. To make this easier, simplify your approach and avoid common traps of black & white farm marketing.
Too many farmers are looking for something or someone to tell them if markets are going up or down, probably because too many advisors sell the false prophecy of price prediction. Instead of trying to figure out what the market will do, farmers should simply learn to use tools that allow you to make decisions. Place your business in control of your financial well-being. Use tools that provide flexibility to be effective across multiple market environments—tools that define risk while retaining opportunity.
Past history has proven that relying on directionally biased farm marketing advice leads to inconsistent results. Too often farmers have too much exposure when markets fall apart and a lack of ownership/ upside opportunity when markets move higher.
Future events dictate future markets
It is a massive understatement to say that many factors will influence and dictate which direction your grain markets will trade in the months and years ahead. This hasn’t changed. Higher or lower, no one can predict what the future has in store.
To put this into perspective, a year ago March Beans gained over $5 per bushel from October to March, while March Corn futures gained nearly $3 between the same time frames. Both commodities exceeded their ‘seasonal’ summertime contract highs after harvest.
It’s important we respect that each marketing year will be different, and this years’ post-harvest price action and direction will be just as unpredictable as any year prior. Be careful you do not underestimate the market’s ability to move beyond your expectations -- higher or lower.
Proceed with caution
What is the market setting you up for today? It’s important to remind readers that the four years preceding this epic bull commodity rally trained many farmers to manage risk. Those years taught farmers to reward rallies as they were short-lived and opportunities could be very, very fleeting. This led to the biggest marketing setup over the past 10 years, causing many to sell too many bushels, too soon.
If farmers didn’t buy calls against their sales, you missed out on a big chunk of the market’s rally in late 2020, 2021 and bleeding into the 2022 crop year. Instead of teaching farmers to consistently use calls against their sales, I’m afraid the pain caused by black & white marketing decisions is instead causing some to revert back to old habits; slowing down forward sales, not looking far enough out, and not protecting enough bushels.
It is fascinating how the human mind works, what we anchor to when making decisions, the pain points we seek to avoid, and how much more credit we give to recent events over past ones.
Watch the funds
How the Funds view commodities going forward is one of my biggest concerns. The Funds (or managed money) have held net long positions across the board for some time now. I’m fearful their sentiment regarding grains could change over the coming year.
Flipping from long to short is often an elevator ride down that happens unpredictably sooner and faster than anyone can fathom. Is there a point we switch back to a burdensome U.S. carryout situation? U.S. farmers have proven the ability to produce bushels if Mother Nature allows, and South American farmers have proven the ability to do so as well.
What is the Market asking for today? When we look at near-term basis values many customers have today, the market seems to be asking producers to sell the cash bushel today versus holding onto it for later delivery. If you are holding onto bushels for upside opportunity, there is a better way to accomplish this. Rewarding the cash market with sales and owning call options allows you to free up cash flow, reduce interest charges on any borrowed money, and, by making that sale, you define your risk to the cost of your long call position. It is truly a fantastic tool that enables you to do so many financially healthy things for your farm while placing yourself in a position to benefit from future market volatility.
Using this strategy might just be the ‘cheapest’ marketing decision you make. As we look out to 2023, if you are locking in these high input prices, you can use a similar tool to cover the cost of production you are locking in.
Retain opportunity and the ability to manage your positions in a calculated, disciplined manner going forward. Marketing decisions are yours to make. Avoid the temptations of black & white price prediction and use tools that allow you to confidently operate in the gray. Embracing this philosophy will position your operation for success, regardless of which way the market goes.
About the Author(s)
Risk advisor, Advance Trading, Inc.
A Dodge City native, Brady joined Advance Trading in 2017. After graduating from Kansas State University, he spent the first four years of his career as a crop scout and advisor, assisting dryland and irrigated farmers with production decisions. Prior to joining ATI, Brady led a specialty corn project in western Kansas, working with both producers and end-users. At home, he enjoys spending time with his growing family, raising Angus cattle, coaching kids wrestling, and an occasional round of golf.
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