Profit, not price, should dictate sales decisions in a fluctuating commodity market.
The June 30 USDA acreage report offered a bit of hope for improving markets with a modest acreage increase for corn, decreases in cotton and wheat and a lower than expected soybean acreage increase.
The report, overall, was bullish, says University of Tennessee Institute of Agriculture Extension economist Aaron Smith in his weekly crops outlook. But in response to Delta Farm Press questions, Smith offers a few observations on the recent USDA-NASS figures.
In Smith's update, he reports: "Corn acres planted were estimated at 92.006 million (950,000 in Tennessee), down 4.984 million (down 90,000 acres in Tennessee) compared to the March 31 projection.
"Most market analysts were projecting a 1-million to 2- million-acre reduction. The larger than expected reduction triggered a 25-point rally in December corn futures."
How should farmers react to this upturn? What marketing strategies should they consider in-season?
"Prices are still not where most producers want them, but in the current marketing environment it is very important for producers to remember that profit is the goal, not price. Most producers have had good growing conditions so far, so if price is up, in addition to higher anticipated yields, the expected revenue is amplified.
"Generally, production (yield) and price move in opposite directions. For example, in May producers were looking at $3.30 corn and an expected trend line yield of 175 bushels per acre ($577.5 per acre). Now at $3.50, plus the potential for higher yields, say 185 bushels per acre, revenue is now projected at $647.5 per acre. That’s a 12% increase in gross revenue.
"Factor in ARC/PLC payments and any other potential revenue sources and the profit (or reduction in loss) has improved for a lot of producers.
"If a profitable opportunity is available, regardless of price, producers need to consider acting. The only way to do this is by working the numbers for your operation.
In his update, Smith notes: "Soybean acres planted were estimated at 83.825 million (1.6 million in Tennessee), up 315,000 nationally (up 100,000 acres in Tennessee).
The reduction in national corn acres did not increase soybean planted acreage nationally; however, in Tennessee corn acres were swapped almost one for one in favor of soybeans. November soybeans rallied over 35 cents as many analysts were projecting increased soybean acres."
What's the upside for soybeans? What are the best marketing opportunities?
"I think soybean prices have more upside potential than corn at this time; however, soybean prices are uncertain right now. A reasonable argument could be made for either a rally or decline.
"Trade with China and the COVID-19 pandemic make this a very fluid situation. I think producers still need to protect the downside through risk management tools, such as options, that can allow producers to take advantage of price rallies while protecting against dramatic price declines.
"Out of the money options can be valuable insurance policies for a reasonable cost. Like corn, soybean producers need to manage for profit not price. So updating expected revenue and expenses is an absolute must as markets and production changes occur through the growing season."
Smith notes that cotton, even with an 11% acreage decline, is an outlier in the somewhat positive report. Even so, "December cotton futures rallied over 3 cents based on the lower acreage," he says.
However, the cotton market is still offering below cost of production for many farmers. What are the best strategies for eking out a profit for 2020? How about government assistance?
"Unfortunately, not many great pricing opportunities exist right now for cotton. We have seen prices get back up to the low 60s, which is a 10- to 13-cent improvement compared to the recent lows.
"Cotton prices could move substantially lower if the global economic recovery stalls or if the COVID-19 pandemic worsens. Some downside protection is warranted. There is a high correlation with economic growth/stability and cotton prices.
"PLC payments through seed cotton base will also provide producers with additional revenue; however, payments are decoupled from planted acres, so it depends on what base acres each farm has as to what payments they will be receiving through ARC or PLC.
"In Tennessee, seed cotton base far exceeds cotton acres planted, so other commodities planted on seed cotton base stand to benefit from PLC seed cotton payments."
Smith notes in his outlook: "July wheat futures rallied 12 cents in the two days following the report."
What effect will that rally have on 2020 fall plantings for Tennessee and the Mid-South?
"One of the biggest challenges the last two years has been getting wheat planted. Wet conditions have resulted in lower plantings than expected or planned by many farmers.
"Prices below $5 will not get farmers excited about planting wheat, but a lot can change between now and winter wheat planting. The weather typically has the final say in how much wheat gets planted each fall in Tennessee and the Mid-South."
Smith's update noted some caveats. "Overall, the report was bullish for futures prices and provided some needed positive news for commodity markets; however, good growing conditions to date and substantial global and domestic stocks will continue to provide head winds for substantial price improvements."
With those favorable growing conditions, should farmers be a bit more aggressive in marketing in-season, assuming average or better yields?
"As previously mentioned, farmers need to manage for profit, not price. If revenue is covering costs, it may be time to lock in a price just to remove some of the downside risk. It really depends on a farmer's risk tolerance and what the cost structure looks like.
"Another very important consideration is the farm's ability to store production. If you can extend the marketing window beyond harvest by storing all or a portion of the crop, you don’t need to price as aggressively as if sales need to occur between now and the end of harvest. It’s a completely different risk profile."
Smith reports that COVID-19 demand recovery and commodity exports (particularly to China) provide a substantial source of uncertainty on the demand side.
Given those ongoing trade issues and the pandemic influence, do you see an opportunity for another government payment to offset market losses?
"We could see an MFP 3.0 or CFAP 2.0 to cover the 2020 crop, but I would caution against penciling in any such payments at this point as there is no certainty. The U.S. federal election also adds a degree of policy uncertainty."
Smith also touched on stocks. "The Grain Stocks report, also released on June 30, received much less attention than the acreage report. Corn stocks were estimated 1% greater than last year at 5.22 billion bushels, soybean stocks were estimated down 22% at 1.39 billion bushels, and wheat stocks were estimated down 3% at 1.04 billion bushels."
What are the market implications of the grain stocks report?
"Global and U.S. grain, oilseed, and cotton stocks are still at high levels, so that will likely keep a lid on prices, barring a production failure in a major producing country. There are just a lot of reserves out there and production has expanded in numerous countries making global production as geographically diversified as it has ever been in recent times."
Smith reiterates that producers have to work their numbers to know how to respond to in-season market fluctuations. "Consider profit, not price," he says.