Storage and casinos

Last week the Argentina government allowed the peso to float versus the dollar and other world currency, causing the value to fall nearly 40%. This meant Argentinian farmers saw their stored beans increase substantially in value overnight. Eventually these farmers should be big sellers, as they are sitting on a large portion of the worlds’ bean supply. But when? It’s unlikely they will sell right away. Many farmers will wait to understand how the devaluation will affect inputs next year against current prices. Long-term, I expect this devaluation to limit upside potential in the bean market.

On a the flip-side of the market, there are some dry weather concerns creeping into Brazil. Precipitation forecasts are varied, which may cause volatility in the market. Combine this with speculators evening out their positions at the end of the year, there may be opportunities for farmers to catch up on sales in the next two weeks.

Have you told Santa what soybean prices you want for Christmas? Be sure he knows your orders and have them in place. If you’ve been good all year, they might get filled. The market can move very fast up and down right now and savvy farmers have their plans in place.

 

Storage and casinos

This week I drove from Minneapolis to Lincoln. There was little to look at with harvest over, but I did notice all the grain bins along the way. It made me wonder what all those farmers’ market strategies were, especially in the newer looking ones. These bins actually reminded me of casinos in a way. Visually they look shiny on the outside, twinkle in as the sun reflects off of them, plus they have no windows. Then there is the gamble many farmers are likely taking on with the unpriced grain sitting inside.

Estimates indicate that most farmers are only about 30% priced against 2015 corn production (some still have 2014 to price). So, it’s safe to say many of the bins I saw had unpriced grain in them. Unfortunately, many farmers don’t realize how much they are gambling by doing this. Instead, I recommend farmers use a long-term marketing strategy that guarantees profits every year.

To reduce the gamble and risk for farmers, I recommend they learn how the market works and use it to their advantage. For instance, many farmers miss out on the market carry premium. I suspect many farmers are hesitant for two reasons. One, they are uncomfortable being 100% priced of APH or even just insured APH yields by harvest, worrying about production issues. Two, is the optimistic belief that “the market just has to go up.” Neither reason is really justifiable to not take advantage of market carry. Sales can be adjusted if production issues happen, and no one ever knows if the market will go up. However, in 8 of the last 8 years, there has been some kind of a market carry premium available in the market, not to mention the addition of basis appreciation from harvest until spring. I like those odds better than basically worrying and hoping.

I try to never store unpriced grain on our farm. I use market carry and basis appreciation to almost guarantee an “edge” every year with my storage. This edge pays for my new bin payments and generates a small profit each year. This strategy is completely opposite of what 90% of farmers do with their storage. Most farmers store grain at home waiting to get higher prices later, you know, gambling.

Don’t have on-farm storage? Commercial storage can also be like a casino. Paying for commercial storage while waiting for prices to increase is a losing game. The house will always win in the long run with their monthly storage fees. Savvy farmers without storage price their grain ahead of time or sell the balance at harvest to avoid storage fees. Even if the farmer isn’t priced at harvest, it’s more profitable to sell at harvest and then buy back their grain on paper, if the farmer wants to wait for higher prices. This cuts out those monthly storage fees, which drains profits away from the farm operation.

I urge all farmers to learn more about how the market works for them so they can reduce risk and increase profits. Farmers need to learn to be the casino owner, not the gambler at the tables. Occasionally gamblers can beat the odds and win big, but long-term gamblers will always lose. The casino’s edge will guarantee their owners profits over the long run. If you want to gamble, go to Vegas. It will probably be cheaper and you’ll get a vacation out of it.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

 

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