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Trade on likelihood not hope

Have we hit the market low?

Many wonder if the market low has passed because markets frequently rally going into October. I’m not sure for several reasons.

  • There are hints that China may start exporting some corn for the first time in 10 years.
  • Harvest is starting slower than usual. Friday I drove from Lincoln, Neb. to Minneapolis and was surprised with how few acres were harvested along I-80 and I-35. I get a sense the market hasn’t been affected much by harvest pressure.
  • Yields are expected to be big this harvest. In fact, some elevators in the western Corn Belt have already started limiting dumping hours.
  • While many farmers are very reluctant to sell at current levels, some landlord shares may get sold across the scale, which may push prices lower in the next few weeks.

 

Harvest reports

Corn is drying fast in the field. Within a week moisture levels on our farm went from 20% to below 15%. Harvest is about 50% over our farm but probably only 20% for most of the Midwest.

Corn yield reports can be best described as “variable” in South Dakota, Nebraska, and Ohio. Most clients tell me their yields are exceeding August estimates. As for beans, the word “record” is being used a lot.

 

Guessing or managing

Many farmers tell me they do well at picking prices. Maybe some do, but many do not. If farmers were good at predicting prices, most would have sold their 2015 crop for over $4 and would have their 2016 crop already sold for $4.25. However, most farmers didn’t get $4 for their 2015 corn and few have much 2016 sold. Sadly, many farmers are fooled into thinking they are good at guessing prices, when in actuality they probably have been lucky.

Some farmers have the misconception that I try to predict prices and sell at the high. Unfortunately, I don’t know when the market will be at its highest. And here’s the thing: no one else knows either.

Instead I try to “manage” the market. What does this mean?

 

Know your breakeven points and be prepared to sell

Since I don’t know where the market will go, I need to be prepared to sell all the time. That way I can take advantage of opportunities when they become available. The key is knowing your breakeven points and selling when the market hits adequate profit levels, because this may end up being the top of the market. Every time I sell, I actually hope it’s the worst of the year.

 

Consider all scenarios

I set up trades based upon what is likely to happen, not what I hope will happen. While I always hope the market goes higher, I know for sure it won’t stay at the top. The prices from five years ago won’t be available in most years. For instance, the last time futures were $4.50 was two years ago. It’s been three years since corn hit $5. Therefore, since $5 corn has happened so infrequently in the last three years, I need to be realistic that it may not happen again for a while.

Nevertheless, I’m still a farmer that needs to make a profit and I will always have more grain to sell. Therefore, I optimize my grain marketing strategy to take advantage of the market if it goes up, but also if it goes down. I even make trades where I profit if the market moves sideways. By taking into consideration multiple scenarios, I reduce my potential risk.

 

Make a plan

If you have any unpriced old corn, you need to create a marketing plan right now. In fact, if less than 50% of your new crop corn is unpriced you should sit down right now and develop a plan because you are adding more risk to your farm operation.

A plan can be as simple as writing a note on your shop door that tells you to sell corn at desired levels. When that price comes, listen to yourself from the previous months and remember you always have more corn to sell. Maybe not today, but for sure in 365 days you will.

If you’re not sure what prices to write down, start with pulling the following numbers:

Yields: Pull the average yields for the last three years

Expenses: Pull the costs for fertilizer, equipment, seed, gas, etc. for the last three years. Other than fertilizer these costs don’t adjust much year over year on our farm (and even fertilizer changes don’t change overall expenses that much).

 

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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