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What’s better: Predicting price, or protecting profit margin?

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As prices whipsaw, stop guessing and adopt a plan that will handle whatever the market throws at you.

This marketing year has already shown us plenty of price volatility before last week. However, what we saw last week sure made me say “Wow!”

July soybeans saw a one-day price drop of $1.19, the 2nd biggest one-day price drop since 1973. We saw November beans drop 90 cents that same day but gain back 60 cents the next day. December corn was down the 40-cent limit, only to be up 42 cents during trading the next day, and close up 33 cents that day. All things that should make you say, “Wow!” They also likely made you say, “what in the world is going on?” With that type of price movement, how do we know what will happen before this week is over?

Next week- June 30 - USDA will release its Acreage and Grain Stocks Report. We don’t know what that will say or do to the market. What happens in July? What happens in the next 6 months? We don’t have the answers to any of those questions. So how can we predict where this market will go? If you think it  seems impossible to market your crops with simple price prediction, you’re on to something.

For me, there are two constants in marketing. First, supply AND demand are always fluid. They are never set in stone, especially during the growing season. Second, you need a marketing plan that has flexibility to handle whatever the market wants to give you.

Supply and demand equations

Since the March 31st Prospective Planting report came out, it sure seems like all we hear about is the supply side of the equation. It is the main focus because we were going through the planting season, and we know we need a good crop or we will likely face tight supplies again.

We also know we have several areas of the Corn Belt that are very dry.

That being said, from March 31st to May 7th, December corn gained $1.59/bu. That could have easily added acres to corn, which would then change supply thoughts. I am hearing estimates for the June 30th acreage report that are 2-3 million higher in acres, and some that are 5 million higher.

For an example, let’s use 3 million more corn acres. If we harvest 90% of those, we have 2.7 million more harvested acres. I will even drop the yield 9 bushels an acre and use 170 for the national yield. That still gives us 460 million more bushels of corn on the supply side. Those extra bushels could take ending stocks as high as 1.8 billion if demand doesn’t change.

We need to also take a quick look at demand. Have the high prices we have seen for the last 6 months hurt feeding? Have producers found alternatives to high priced feed? We will get some updated figures on that in the June 30th Stocks report. Ethanol margins had been strong all spring, and now with RIN prices dropping, ethanol margins are weak, to even negative in the future.

When it comes to exports, we will likely have way more competition from Ukraine this next winter than we did this past year. This may jeopardize our export ideas.

You can see there is a lot that goes into the demand picture anyway, and it is always changing. High prices do cure high prices.

A plan to protect profit

You should have a marketing plan in place and executed by now. If you haven’t, it is not too late to start. In a real-life example of a customer I spoke with early last week, this producer had done nothing for 2021. They were a deer in headlights, not really knowing what to do, because they felt that we were in a drought and the market ‘had to go higher’.

Well, we know it doesn’t have to do anything we think it should.

This producer did know their costs of production though, and we could work on looking at profit margin. For their operation, we could sell 25% of expected production at the fall price that day, and then cover what was not sold with put options. Those put options gave him a price floor, which would lock in a worst-case scenario. If the market went higher from here, they are still in the market because those bushels are not sold. By doing this for corn and soybeans, this producer could lock in a profit, above ALL costs, of $200,000. This was $200,000 coming back to the operation, as a worst-case scenario. They still have market flexibility and they are still in the market if we go higher.

This was just one example, but you can see how the mentality might change if you stop trying to predict price, but instead, concentrate your efforts into protecting margin.

Here’s the take home from this blog: All other businesses out there protect profit margin rather than trying to predict something that is impossible to predict. Why shouldn’t farmers?

Locking in future profit

If mentality changes to protecting margin, you would also realize that it is not too early to look at 2022. If your marketing plan has flexibility, you can protect margin today for 2022, and know the upside in the market is wide open for you if we go that direction. If we go lower, you already have margin protected for next year. You could be set up to have a profitable 2020, 2021, and 2022.

Supply AND demand are ever changing. The story isn’t truly written until the end of each marketing year. Knowing that things are always changing, you realize price prediction is impossible, and you can set your sights on a marketing plan that protects profit, not price.

 

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. Examples should be considered hypothetical.

 

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.

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