The USDA releases its August crop report this Wednesday at 11 AM CDT. It will be the first USDA estimate on the size of our corn and soybean crops. We will see additional crop estimates in September, October, and November and final numbers come out January 2021 (there is no crop production estimate in December.)
How will crop estimates influence price? There are many factors at play, including U.S. and world carry-out, demand, and events taking place in the U.S. and world.
But weather is a big one.
In my 38 years serving farmers’ risk management needs I have witnessed significant production shortfalls via heat and drought, (and corresponding price rallies) in 1983, 1988 and 2012. We also saw the historic floods of 1993 knock back production and push prices higher. The spring of 2019 certainly presented challenges as well, which led to higher prices.
What about now?
The market appears to expect large U.S. corn and soybean yields in this upcoming report. If you’re in a region that has suffered from weather, that may not set well with you. But historically, weather hiccups spark rallies only when these issues are widespread. The U.S. farmer does an excellent job at growing crops and we’ve seen great production even in years with less than ideal weather. You are the best in the world at growing crops.
The key to balancing your bias on U.S. yield expectations is to try and be objective when comparing good production areas to those not as good. Ask yourself if it appears the areas with solid yields outweigh the areas with less than ideal production.
Hope is not a plan
USDA reports can and have in the past created price swings up or down, which can create a market move in the opposite direction of what you had hoped. This year prices have traded at less than breakeven levels for many months.
As a result, most farmers have sold very few bushels ahead of Wednesdays report.
If the August report is bearish and prices move lower, most U.S. farmers will incur the pain of seeing price continue to work even further below profitable levels. If more bushels are unsold and the report is negative the frustration is high, and the result will be to attack USDA.
This cycle can be broken with better planning and acting on your marketing plan.
Avoid this trap
How can we avoid the trap of bearish prices and negative USDA reports inflicting pain to your price objectives? My suggestions are below:
- The U.S. farmer is not reducing downside risk in a significant way prior to harvest. In other words, we see very small amounts of forward sales prior to the crop being placed in the bin at harvest. We need to see price defended on a much larger percent of the expected crop in the field.
- Most U.S. farmers rely only on forward pricing cash bushels to manage risk. The decision to learn how other tools work in addition to cash sales is lacking for many. To sell or not to sell brings in to play indecision and emotion, year after year. This is not a plan.
- Despite most growing seasons producing solid crops, we delay pricing decisions based on an expectation of a future weather market and prices to increase. With the current crop insurance policies, your risk is declining prices, not poor crop production. Most of you do not have pricing objectives in place. As a grower you hope for higher prices but at what level will you act on price? Your plan must also include, ‘what action have I taken if prices move lower?’
- Lastly, we are not taking advantage of time. Most pricing decisions are made in a short time window when you should be looking for pricing opportunities in longer windows. If we begin setting objectives on price, we can then begin looking out ahead for these opportunities. For example, the price of December 2020 corn traded on the CBOT as high as $4.23 ½ in July 2019. Many would have been excited to manage at that price, but with little forward marketing done on the ’19 crop, it was hard for many to look ahead to the 2020 crop.
What to do now
If prices start to move higher after the USDA report, have your pricing plan in place. If prices move lower, I know the temptation will be to be angry with USDA. But that solves nothing. We can do better. A winning marketing plan assumes price can move lower as well as higher.
It’s often said big crops get bigger while small crops get smaller. Don’t sit around and wait to find out which one happens this year. Have a plan, set objectives, and defend risk regardless of where you think future prices are heading.