Focusing on 2017 instead of 2016

The USDA report published on Thursday held few surprises. Basically we have too much corn and wheat, and most likely too many beans. Expect more sideways trading in the short-term.

South America Update

South American weather has been “normal.” Many expect record yields in Brazil and trend-line yields in Argentina. Combined yields may exceed early season predictions. Also, export paces seems strong with few logistical issues so far.

Basis

Basis levels in the U.S. are extremely low for this time of year. This signifies end users are having no problem getting the supply they need and that prices are higher than they need to encourage farmer selling.

Export

U.S. exporting is pacing above normal, which may indicate the USDA underestimated demand. It may be too soon to tell though. South America may have an impact in the upcoming months.

Soybeans

Soybean futures values are nearly $1.80 per bushel higher this year than last year at this time. One difference, the funds had a big short position last year, and this year they have a sizable long position. The bean market has some big risk premiums built into the price right now.

In the last three months, I traveled throughout the Midwest giving marketing presentations to farmers. While talking to farmers I noticed most are focused on only the present. They ask what I think prices will be in the short-term (i.e. the next two weeks). When I say, “I don’t know, probably flat” they are discouraged.

I understand. Farmers long for the glory days of 2010-2012, when grain marketing was easy. If farmers were patient enough, and waited long enough, the market would eventually go up. Unfortunately, when it’s easy and everybody can do it, it isn’t an efficient market, and won’t last. It’s easy for everyone to forget 1997-2007 when the market was mostly flat year over year and profits were tougher.

As a solution, the “experts” are urging farmers to “tighten their belts” by getting expenses down. While that’s important, farmers should always be doing this, and most are. Farmers may be able to “tighten” a few cents out of their expenses, but they still need to buy quality seed, fertilizer, update equipment, etc. Realizing that this advice doesn’t help them, many are still waiting and hoping for corn to rally.

Is there another “golden age” of $7 corn around the corner? Maybe. I hope so.

Will it be next year? Three years? Five years? I don’t know. No one does.

 

So what can farmers do now?

Farmers need to take control of their farm operation. They need to think about their farm operation like a CEO does a business. A good CEO doesn’t sit around hoping their business goes well, waiting for their annual bonus. Good CEOs are forward-thinking. They plan where the business needs to go one, five, 10 years from now, planning for both good and bad years.

This is the approach I take with my farm. By planning ahead, we’ve been profitable the last five years despite a lower trending market.

 

What should farmers do differently?

Most farmers grow their crop and maybe sell a small portion before harvest, then once harvest is over, they focus on selling the rest of it over the next two, four or eight months. During my winter presentations attendees are surprised that I rarely talk about old crop. All my planning and focus right now is on the next harvest seven months from now because that’s where all the money is!

 

What can I do with unpriced grain right now?

Forget about it and focus on new crop, because you have already missed all the opportunities available to you on the old crop. I know this advice can make farmers uncomfortable, because it runs counter to what most have always known and done. No one likes change, especially when it comes to money. But, if farmers want to be more profitable, this is a good way to do it. The numbers don’t lie, market carry, basis appreciation, to name a few are how it’s done.

 

What if there is a drought this summer?

Some farmers will hold old crop thinking if a drought comes during the summer, they’ll be in the money (i.e. a home run). Remember, if corn rallies due to drought, both old crop AND new crop will rally. So, I still get to take advantage of the rally, but it is for future corn that I will harvest, not for corn sitting in my bin.

Side note: betting on a drought to sell your old crop corn has low odds. In the last 30 years there were only seven big drought years. So based upon trend-lines, that means there is a 77% chance there won’t be a drought. That isn’t a great bet in most years.

 

What if prices continue and old crop never reaches profitable levels?

Think of it this way, what if new crop prices are at breakeven or profitable levels and you don’t plan ahead to take advantage of it and you are in the same situation next year as this year? Do you want to take two years at potentially unprofitable levels? Doesn’t it make sense to get the new crop guaranteed at a profit by planning ahead? If farmers start looking at new crop now, it is a real possibility that they can be profitable in at least one year. Then if prices go up after the 2017 harvest, that’s great, they can then sell 2018 corn one year ahead, always rolling forward and always planning ahead.

 

How clear is your windshield?

Someone told me this week that when it comes to grain marketing, “the windshield isn’t clear, but the mirror is.” This sounds good, but the windshield isn’t as dirty as farmers think. It just takes making a plan to clear the dirt away. When farmers lay out a plan that shows their expenses and required profit price points, they can look at future prices more clearly. Then they can take advantage of opportunities as they move forward, while occasionally looking in their rear-view mirror.

 

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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