The 8/10 USDA report caught many off guard last week. Even I thought the USDA would trim back corn yield estimates more than they did. As always happens after these reports, the bulls and bears debated the accuracy of these reports. Bulls say the vegetative health maps indicate widespread problems, while bears point out that only 15% of corn is suffering from drought conditions according to the drought monitor index. Bulls say Iowa and Illinois were too dry in June, while bears say seed genetics have allowed for plants to withstand dry conditions. Since the report leaned bearish, the bulls are a bit more vocal, suggesting that the estimates are completely off base and will ultimately change by the next report.
Historically, in the last 20 years the August USDA yield estimates have been within a 4% average error of the final national yield. A 4% variance would mean a potential six-bushel decrease. And while I’ve heard some conspiracy theories on this topic, I don’t see the incentive for USDA statisticians to be inaccurate or misleading in their estimates. The more accurate they are, the better it is for everyone in the long term for both producers and end users.
Considering that many thought the yields estimate would be at least another three bushels lower, it’s surprising that corn prices remained in a 10-cent range. I suspect the market doesn’t believe the USDA number yet and is being cautious for another month. Without a significant yield reduction, corn will struggle getting back to $4. In the meantime, few farmers will be sellers at these price levels until closer to harvest, which might keep prices from falling much more in the short term.
The USDA report increased bean yield estimates, but August weather can still have a big impact on this year’s crop.
Last week, before the USDA report, I completed my 2016 futures prices by selling my final 2% of ‘16 production at $3.70 against the Sep futures.
With that sale complete, my average futures only position is $3.91. Plus, I have additional premiums to add: 27 cents of options premiums I accumulated throughout the marketing year and 24 cents of market carry premium for holding my grain until summer. Therefore, my final 2016 futures prices take home has a current market value of $4.42. With where the market finished last week on Sep futures, I consider this a success.
The combine seat as a marketing strategy
While I’m pleased with my final 2016 price, knowing what I know now, I should have sold much more than I did in June 2016 when prices rallied for a short time. Maybe I will even look back at 2017 and think I should have sold more of the ’17 crop as well. After all, hindsight is always 20/20. I suspect I’m not the only farmer thinking this right now. It’s easy for farmers to kick themselves for not selling enough when prices were at profitable price points, after months of disappointment. And while it’s human nature to think this way to an extent, it’s really a waste of time dwelling on the missed opportunities of the past. Farmers should instead be focusing on their ’17 and ’18 crop right now. They should be thinking and looking forward.
Grain marketing is a lot like driving a combine in that way. When you’re sitting in the driver’s seat you can’t look behind you. You can only focus on what is in front of you and where you are going. You need to look forward to see what’s coming, not trying to watch where you’ve been or staring at the grain filling up the tank. There may be ditches, rocks, logs, terraces, etc. to navigate. Not paying attention to where you are going can cause some real damage. A damaged combine will bring a harvest to a standstill, thus you are no longer moving forward. It’s the moving forward that is essential for farmers to continue being profitable.
The same is true for marketing. Even if farmers aren’t fully sold or priced on their old crop ’16 corn, there are few options left for farmers to take advantage of at this point to add premium to their bottom line (i.e. market carry), and dwelling on what price you should have sold at is wasted energy. Instead, farmers should take a lesson from the ’16 crop year and realize that prices don’t necessarily have to go up. What if the bears are right? What if the USDA is right? The market could trade sideways for another 12+ months. And my question to you is: are you ready if that happens?
If farmers start thinking forward now, they can take advantage of premium opportunities that become available in the next few months. And I’m not just talking about ’17, but the ’18 crop too, which is only 13 months away from being harvested. What price do you wish you would have sold in ’16 or even ’17? That price may be available in ’18 now or soon. It never hurts to sell forward a little bit, just in cast prices are stagnant long term. Remember, there is always more corn to sell. And unfortunately for many, there is still old crop left to sell too. You can hope prices rally, but you need to have a plan if they don’t.
So, stop trying to look behind the combine to see what’s behind you. Instead, look out that front window at what’s coming toward you so you can navigate all of the bumps in the rows ahead as effectively and profitably as possible.
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 email@example.com.