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Don’t be lulled to sleep on price management

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Markets could be reentering a bull-run cycle for the next few years and for many, the urge to manage risk may fade.

2020 is certainly turning out to be one for the books, though I’d imagine most of us would prefer to forget it.

The pandemic remains a major catalyst for global financial markets. A global demand led by a surge in China’s purchase of U.S. commodities and the uncertain condition of the final U.S. crop being harvested have made for an extremely fragile fall for farmers. 

Those of us who have been involved in commodities have seen crazy years, but 2020 certainly takes the cake.

Hindsight is 20/20 (pun intended), but let’s take a look back at prices from just two months ago.

We traded at values just under 90 cents lower than this week’s trade in corn, while beans have rallied more than $2 per bushel off lows seen in August. All of this after the markets were looking for potentially 180-plus bpa corn yields, 3-plus billion bushels (now many anticipating 1.8 billion bu. or less) new crop carryout in corn, and close to 60 bpa bean yields and 1 billion bu. new crop bean carryout (now many anticipating sub 300 million bu. or less). 

The market has a funny way of both educating and reminding us that, regardless of our personal opinion or bias, the trade does not care what anyone thinks, feels, or is owed in terms of price. That uncertainty can be managed. It can also provide opportunity, using transparent and very liquid tools.

Time to learn more?

Though flat prices have rallied, it’s not too late to learn more about and initiate a prudent long-term risk management program for your operation.

Markets could be reentering a bull-run cycle for the next few years and for many, the appeal to seek out market price management may fade. Fight the urge to fall into that trap. Maintain consistency in your marketing plan each year. Past higher price cycles are not indicative of future ones and current upside price moves may be short-lived. 

This year’s demand-led market, stemming from China’s ongoing corn and bean buying, is very unique. In a “normal” harvest time, seasonal pressure would press futures prices and basis as the onslaught of new crop supplies overwhelmed near term usage, space, and logistics. This year’s bean rally and strong bean basis levels have offered the producer very appealing net cash values, of which most producers have taken advantage.

Strong export demand for corn combined with lighter new crop sales and a later start to new crop corn harvest have kept corn futures strong and strengthened cash basis in many cases. Much of the U.S. is seeing current corn basis bids at levels that are well beyond the typical rates for mid-harvest. This strength in basis has narrowed carry in spreads for both corn and beans, taking the incentive to carry either commodity forward out of the equation.

The market clearly wants your grain, yet it is not going to provide you with enough carry to justify maintaining ownership. 

Should you store grain?

Though the market is signaling it wants your bushels, the attractiveness of possible future upside in flat price is misguiding many into placing corn/beans in farm or commercial storage.

If you are considering that plan, go through the numbers. You will likely find it’s a risk not worth taking especially when taking into account today’s cash price combined with interest cost savings in paying off operating lines, cost of storage (yes there is a cost to store on farm), and shrink.

A more efficient means of owning the crop without exposing yourself to the cost of holding would be an alternative flat price position – vanilla call option ownership. A number of producers I’ve spoken to, both directly and in groups, have realized the benefits of selling new crop today while maintaining market participation using these alternative tools. Feel free to contact me if you’d like more details or want to discuss your situation in detail.      

Contact Advance Trading at (800) 664-2321 or go to www.advance-trading.com
Information provided may include opinions of the author and is subject to the following disclosures:
The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results. Examples are used for illustrative purposes and should be considered hypothetical.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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