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Expect the unexpected in markets and marketing

Larry Stalcup CCSPG-Corn_Photo-5.jpg
The bewildered markets have magnified the need for growers to use proficient price risk management.

If cotton, corn and soybean markets could go wrong — they have in the tumultuous 2020. Despite hope from the new China and U.S., Mexico and Canada trade deals, COVID-19 crashed ag price potential. The bewildered markets have magnified the need for growers to use proficient price risk management.

Extension economists Aaron Smith from the University of Tennessee and Michael Deliberto from Louisiana State University advise weary growers to take action to protect against further market plunges, and prepare to capture upside markets when they can.

“Before COVID-19 hit, most producers were cautiously optimistic that 2020 could be a good year,” Smith says. “We were coming off the Phase One China trade deal signing, and farmers felt good about the potential increased ag sales to China and the potentially positive effect on prices.

“Prices were reasonably strong in January. Corn was just above $4 per bushel, soybeans were about $9.50 per bushel, and cotton was over 72 cents per pound. I don’t think many would have believed those would have been the high points in terms of pricing opportunities for the rest of the year.”

High volatility 

Price volatility exploded. December 2020 cotton futures sunk from near 70 cents in February to a demoralizing 50-cent level in April. The December 2020 corn futures price was above $3.90 in February. By mid-April, it was struggling to stay above $3.30 and was about $3.40 in late August.

CCSPG_Deliberto.jpgMichael Deliberto, Louisiana State University. (Courtesy Louisiana State University)

November 2020 soybean futures were about $9.60 in January. They were below $8.40 in mid-March. Between July 1 and late August, November beans rode a rollercoaster between $8.60 and $9.20.

Deliberto notes that corn and ethanol prices suffered after oil prices plunged following supply gluts and the fact that COVID-induced worldwide lockdowns kept cars off the road for weeks and months.

“Cotton prices tanked after retail apparel sales were down over 70% this spring,” he says. “The market’s upside also remains capped by the economic fallout surrounding COVID-19, which has curbed global demand for textiles.

“For soybeans, ample new-crop Brazilian supplies have been even more attractive to Chinese buyers, given the historic weakness in the Brazilian real (currency) compared with the U.S. dollar.”

The wavering 2020 crop markets reaffirm their high uncertainty, Smith stresses. “The main takeaway is that markets are highly unpredictable,” he says. “Producers and end users need to implement some form of risk management, through crop insurance, option contracts, futures, cash-forward contracts or a combination of all."

Derecho’s effect?

The freak “heartland hurricane” that engulfed Iowa and other Corn Belt states in mid-August was yet another factor that likely will impact corn and soybean markets. With tens of millions of corn and bean acres impacted, markets may see further price increases due to tighter U.S. grain supplies.

“With the impact of the recent severe weather in the Midwest, what was once a bear corn market now can be characterized as slightly bullish,” Deliberto says.

“The storm’s exact impact will take time to analyze, although initial reports classify the damaged area to over 37 million acres of farmland. Depending on the losses, December corn futures could be well on their way to eclipsing the $3.40 mark, with the next resistance at the June high of $3.48, with stiff resistance of $3.60.

“For soybeans, carryover grew as yields were increased in the August WASDE report. However, soybean futures increased. Increased export sales to China were positive for the market.

“The November contract reversed and moved above $9. As with corn, until the extent of crop damage is known, the market may remain choppy.”

Market strategies 

Cotton, corn and soybean sales will continue to be impacted by the China trade deal and the Unites States-Mexico-Canada Agreement, which was signed into law this summer. However, there’s never a guarantee how these and other trade agreements will benefit crop producers.

Market spikes can happen any day, or even hour. Smith says producers should strive to establish minimum expected revenue through crop insurance then use further opportunities to capture better prices if and when those spikes occur.

“After setting crop insurance coverage, producers should consider using other tools, such as out-of-the-money put options, to establish price floors,” he explains.

“I think incremental pricing is a very important strategy. For example, we only had one month this year when corn prices were over $4 and soybeans over $9.50, and that was January.

“Normally, we get some decent in-season pricing opportunities, but that did not occur this year. Spreading out the risk over time helps avoid pricing all your production at low points.”

Smith suggests using periodic sales to spread out pricing. “I’m a proponent of marketing some production, 25% or less, a year in advance of harvest if circumstances dictate it,” he says. “But right now, I am not seeing strong opportunities.

“However, if 2021 crop futures prices get above $3.90 for corn, $9.40 for soybeans or near 70 cents for cotton, producers should start their incremental pricing. Time is still on their side for 2021.”

Decision dates

Deliberto says growers should establish dates at which they time their sales. “These decision dates represent the timing of pricing grain, regardless of whether the price target is met, as long as the price is higher than one’s minimum,” he says.

“Decision dates transform a marketing plan from a plan on paper of high prices to a real plan of action. For example, what was an attractive price for a December corn yesterday may not be the case today.

CCSPG_Aaron-Smith.jpgAaron Smith, University of Tennessee. (Courtesy University of Tennessee)

“Decision dates have a way of diminishing the importance of maximum price targets, in that realistic target prices should be set based on grounded market expectations. Hindsight always appears to be 20/20. If a sale was made, how much production was booked?”

Depending on their demands for potential sales, grain buyers set their own basis, even though a regional basis may be a certain figure. Deliberto encourages farmers to shop for the best basis.

“Producers should take into consideration which delivery locations are most profitable,” he says. “By shopping around one’s area for the best basis, a grower may gain a few cents a bushel.”

Individual gins or cotton co-ops may have their own markets to fill and their own hedges in place. They may offer a better contract price. Consider looking at early bids to determine if there is a stronger contract offered nearby. 

If prices remain low, storing grain may provide opportunities for better prices. To extend the marketing window, Smith says producers should determine how many bushels they can store and what storage will cost. “After that, look at what they have invested in the crop to determine what revenue they need to cover cash costs and economic costs,” he says. “Producers need to remember that profit is the goal — not price. If a combination of expected yield, price and government payments results in a profit, you need to act.” 

Strategies and complexity will vary from operation to operation. Smith says outside expertise in marketing can ease the strain — even if another COVID-type episode infects ag commodity demand and prices.

“Most producers have become very good production risk managers, but managing the marketing and financial risk continues to be a challenge for many,” he says. “Looking forward, I think those producers that are good financial managers will be the ones that survive the current low-price environment.” 

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