Anyone who marketed grain this past spring and summer probably wished they had waited longer to pull the trigger, with prices surging between August and November.

“In a year like 2020, you were rewarded if you didn’t make proactive sales,” notes Adam Baldwin, who grows corn, soybeans, wheat, sorghum and popcorn on his south-central Kansas farm. 

Even so, Baldwin was able to carve out some profits last year by focusing on “the one in the hand and not the two in the bush,” as he puts it.

“It was such a goofy year, that I looked at it as a total anomaly,” he says. “It’s hard to use 2020 as a means to change your plans dramatically. The guys who hit a home run might have struck out a lot of other years.”

Farmers have been increasingly eager in recent months to cash in on the high commodity prices and strengthening basis levels fueled by strong domestic and export demand.

In November, USDA showed some very bullish data in its monthly World Agricultural Supply and Demand Estimates report.
For example, corn ending stocks for the 2020-21 marketing year fell to 1.7 billion bushels, reaching the lowest levels since 2013-14. Soybean ending stocks also fell to the lowest levels in seven years, to just 190 million bushels.

Export pace has also been brisk throughout the fall and early winter. Through Nov. 19, corn exports were outpacing volume from a year ago by 59%, with 366.1 million bushels. And soybean exports were faring even better, nearly doubling the prior year’s pace with 905.1 million bushels since Sept. 1.

Prices shot higher in response. Corn futures climbed back over $4 per bushel for the first time since September 2019, and soybean futures clawed back above $11 per bushel for the first time since the summer of 2016. CBOT wheat prices have also been relatively strong, with nearby contracts hovering around $6 per bushel.

The potential for profit is high, but how do you make the best of a good situation?

Plan, plan, plan

You’ve probably heard the term “buyer’s remorse,” but here’s a reminder that “seller’s remorse” is also real and may have a big psychological impact on some operations this year. For example, did you sell some soybeans at $10 per bushel, only to watch them move nearly $2 per bushel higher in the weeks that followed? Don’t let that regret freeze decision-making moving forward.

The reality is, it’s hard to consistently sell at the high, says Naomi Blohm, senior market adviser with Stewart Peterson. “You have to have realistic expectations,” she says. “Don’t beat yourself up. The key to marketing is consistency and discipline, which you will get by having a strategy in place.”

That doesn’t mean being overly aggressive with sales, but don’t sleep on them, either, Blohm recommends. Sometimes, pulling the trigger with a more modest sale will build confidence and positive momentum. “Start with a 5% sale if it’s prudent and profitable,” she says.

Strong fundamentals suggest grain prices could move even higher. There are no guarantees, however, especially if global competitors such as Brazil, Argentina, Russia and others find favorable weather forecasts moving forward, which would replenish dwindling world supplies and drum up additional competition for U.S. grain.

“It’s hard to say where prices will go, so it’s important to take advantage of prices right now,” notes Ashley Arrington, co-founder of Agri Authority. “It makes sense to book some sales, but you don’t have to book everything. There’s a happy medium to be found. You’re never going to sell it all at the top.”

Don’t obsess over your marketing plan, Arrington adds, but do keep an eye on the market. She recommends setting aside some time once per month to review your plan and adjust as needed.

Maintain discipline

The psychology of marketing grain will definitely be different in 2021 compared to last year, Arrington says. “Yes, we have higher prices, but we need to maintain the discipline we had at lower prices,” she says. “Don’t throw those lessons by the wayside. Look at margins and see what you need to sell for cash flow purchases. Fix your so-called ‘money pits’ and pay down debt so you can regain equity to weather the next low-price storm.”

Blohm agrees — never let your guard down. Farmers used the price surge of 2012-13 to pay down debt and limit future risk exposure. Those moves got a lot of operations through the lean times that followed.

“Prices won’t stay high forever,” she says. “Don’t get complacent and feel like you don’t have to do any marketing.”

Paying down debts should be the top priority, but opportunities to improve farm infrastructure or replace aging equipment may also be too good to pass up. A look at recent history hints that purchases of tractors or other farm equipment will jump significantly in 2021, according to Brady Brewer, assistant professor of agricultural economics at Purdue University.

“Data from 2012-15 suggests a 30% increase in equipment purchases and 30% increase in equipment inventory,” he says.

But return on investment metrics for equipment sank dramatically after that period as profitability decreased. Brewer recommends using a long-term outlook to make any looming equipment purchases.

“If you are going to buy an asset that will not provide a reliable ROI, it may not be worth the investment,” he says. “Pencil it out. Is it a needed replacement of an asset, and will the increased cash flow support it? Make sure purchases add to the bottom line of your farm’s profitability.”

Farms with less equity and slim working capital margins would do better to rebuild cash reserves, Brewer concludes.

Hedge your bets?

Ultimately, any solid grain-marketing plan should take into consideration how your strategies may perform in different environments — bullish, bearish and neutral, says Joe Camp, director of managed programs with Commstock Investments. “Manage expectations by knowing how your sales approach will change if prices do not go the way of your initial outlook,” he says.

Higher prices right now are a blessing for cash-strapped operations, but prices are all but guaranteed to topple if fundamentals shift to a more bearish tone.

A lot is riding on South America right now. Argentina and Brazil got off to an overly dry start, but timely rains later in the season could fuel another year of bumper corn and soybean crops.

For wheat, Australia is already on the rebound, with Russia expected to unlock an additional 92 million bushels of exports between mid-February and the end of June.

That’s what makes storage hedges like long put options for corn bushels that were unpriced after harvest a potentially savvy move, Camp says. “Use May contracts for short hedges against, so that they may possibly be rolled forward into wider carry if the outlook calls for continued storage.”

Basis contracts may be an attractive alternative in lieu of commercial storage charges, or a minimum price contract may be suitable, Camp adds. “Look to scale hedges into the September contract that is currently discounted at the far end of the old-crop futures curve.”

For soybeans, Camp suggests making some more immediate sales for cash flow needs and financing any hedges on stored corn.

“Replacement hedges may be opened against cash soybean sales, with a bull call option spread that would open upside participation in the market for July futures, for example,” he says. “Weakness this winter would be explored as a possible opportunity for the program to recommend buy backs or long call option hedges for sales previously booked against SX21 new-crop futures.”

Lending risk remains

Bankers are not likely to relax in a new era of higher prices. Brewer says little evidence  suggests a major change in farmer-lender relationships in the new year.

“There is a lot of uncertainty surrounding the future of government payments that supported farm cash flows over the past several years,” he says. “Lenders are cautiously optimistic about improving economic conditions for farmers, but they are not changing collateral requirements any time soon.”

Six months ago, lenders were worried about nonperforming loans, Brewer says. That pressure has been alleviated with rising commodity prices. “Equipment and land purchases will still be attractive, and the Federal Reserve does not seem too worried about overall inflation rates,” which suggests that interest rates are not likely to rise significantly in the short run. “That means that farmland prices will remain strong in the foreseeable future, and capital will remain cheap.”

Camp says cash rent prices should continue to track closely with this uptick in land values, thanks to higher farm income levels, low interest rates and lower selling interest from landowners. Input prices may be mostly level from last year, with the exception of fertilizer, which could drop even more.

“Fertilizer supplies are abundant and well-positioned at the moment to leave prices for inputs like anhydrous, DAP and potash down near multiyear lows,” he says. “Stronger crop margins support fertilizer demand, but total usage and overall input costs could fall if farmers reduce corn acreage in favor of soybeans this spring.” 

Farmers experienced some price whiplash last year — but fortunately in a bullish direction, notes David Widmar, ag economist with Agricultural Economic Insights.

“There were a lot of sleepless nights last spring,” he says. “Keep in mind where we’ve come from. We had $3.20 corn in August, which jumped to $4.20 in early December.”

To plan for what may come next, Widmar suggests thinking through a range of possible outcomes. For example, ask yourself: What’s the probability that corn will go up 50 cents over the next three or four months? Also, ask the corollary: What’s the probability that corn will go down 50 cents in the same period?

Knowing where prices are at now and where they could realistically move in the near future is critical for smart planning, Widmar says. “Don’t aimlessly chase prices.”

In the short run, prices are likely to be largely dependent upon persistent dry weather in South America and Chinese export demand, according to Ryan Kelbrants, market analyst and broker at CHS Hedging LLC. These factors could make or break the current bull markets. Speculative funds have also been a big factor in this rally. The funds drove up prices in the aftermath of the August derecho and were on a buying streak until mid-November when Chinese buying interest faltered.

“China is not buying as many beans now as this summer, but they are buying a lot of corn and sorghum,” Kelbrants says.

Like Camp, Kelbrants recommends using some “mechanics of the markets” to manage risk. He suggests that implementing sell stops and buying stops depending on your position can be strategies to limit risk exposure as long as breakeven boundaries are kept closely in mind.

Baldwin says what happened in 2020 won’t dramatically affect his marketing plan. He blends a mix of strategies, including hedge-to-arrive contracts, stored grain, options and forward sales.

“Just like our farm is diverse, I want a diverse approach to marketing,” he says. “You have to have a plan that spreads risk and is consistent.”