June 29, 2020
Getting an early start is critical to successful grain marketing. But how early is early?
Some might believe that getting going with the marketing plan by May, June or July during the growing season is early. But is that truly early enough? Some of the best opportunities in the past five years have come far in advance of those months.
And if you’re still waiting for better prices to come along, it may be time to rethink how you market your stored grain.
Admittedly, during this time frame we’ve been experiencing higher than normal world & U.S. stocks, with many record yields realized here and in Brazil, resulting in a lower price environment than was experienced in the previous 5-10 years. Recent demand destruction in the U.S. has further exasperated the current price situation.
June is a winner
Let’s take a look at corn prices over the most recent five marketing years.
In calculating the average price of December futures during individual pre-harvest months, and then comparing each period to the average December futures price during the month of October, some interesting observations come into view. While past performance is not necessarily indicative of future results, during this timeframe, the best monthly average pricing period has been in June—16 months prior to October.
Over the past five years, this extended early pricing month has been 49 cents a bushel higher than the October average, with a range of individual years being approximately 14 to 76 cents above the October timeframe.
Second place has been the July period (15 months prior) which was 40 cents greater than the October average.
As a prudent risk manager, it is extremely important to build plenty of flexibility into the marketing plan, considering U.S. or world supply-tightening events could quickly jolt prices sharply higher.
How could you be more flexible? For sales executed this far in advance, purchase call options to participate in higher prices, and buy put options on the remainder of the unsold expected production.
What did the study results show for soybeans? The best monthly average was again (surprise) during the June period that’s 16 months before October. This monthly average was 75 cents per bushel greater than the October average, with a range of 42 cents less than October to $3.01 greater.
As was the case in corn, the following month, July, was the next best month for soybean pricing, being 54 cents higher.
Anything can happen in a marketing year, and major unexpected events can always come along to significantly alter the whole picture. However, as the numbers in recent years show for both corn & soybeans, significant price benefits have been realized by starting 15-16 months before October, while staying flexible in the marketing plan.
Head start with futures carry
Picture yourself way back in grade school days. You’re ready to race your classmates around the track -- but instead of everyone beginning at once, the gym teacher gives you a 40-yard head start. You’ve got an improved chance of winning, don’t you?
How does that apply to your grain marketing?
As the table shows, December 2021 corn futures are 34 cents a bushel above December 2020 futures (2020 crop). Taken a step further, Dec’21 corn futures are 45 cents greater than nearby July’21 futures (2019 crop).
All things being kept equal, if U.S. producers are able to grow a trend line yield this growing season (177-178 bpa), where could Dec’21 corn futures be a year from now? Maybe somewhere between 3.20 & 3.30. This crop year to crop year futures carry is, in effect, giving you a 34 – 45 cent “head start” on 2021 crop marketing.
You do want to win at farming, don't you.
Holder Hank and Hedger Harry
Can being proactive prior to harvest help a person take advantage of marketing opportunities after harvest? Let’s take a look at two individuals. Holder Hank does very little in way of marketing before he’s pretty sure he has a crop. He still has 25% of the old crop in his bin and was earlier in the year waiting for higher prices to protect/sell 2020 crop. This didn’t materialize, so he has no corn defended for what’s growing in the field and no defendable position in which to manage the futures carry after harvest. Hedger Harry has all of his ’19 crop sold while still retaining some upside ability on a smaller portion of his crop. His ’20 crop is all protected with a combination of Futures Sales/HTA’s and put options. Is he in a position to manage the futures carry at harvest and beyond? Yes. His $4 December Futures/HTA’s for example, could be rolled out to March, May, or July futures at some point to capture the futures carry. Currently July 2021 futures are nearly 26 cents above December 2020 futures. What if a large harvest is realized this fall with a tight storage situation across the Midwest? Could the futures carry from Dec to July pay the hedger 35 cents? It is certainly possible in a year like this.
If that came to pass, the $4.00 Dec Futures Sale/HTA could become a $4.35 July Futures Sale/HTA before roll fees.
Being proactive well in advance can many times open up opportunities later in the marketing year, whereas getting behind in marketing can negatively impact multiple crop years.
With the large stocks, low price environment that we are in, it is even more important than ever consider these marketing opportunities. Starting much earlier than normal to:
defend prices while still keeping upside flexibility,
managing the futures carry from crop year to crop year and within a crop year,
can make a significant difference to your bottom line in these uncertain times in agriculture.
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.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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