Todd's Take

By Todd Hultman
DTN Analyst

As we close in on the half-way mark of 2016 and are just two days shy of USDA’s Acreage and Grain Stocks reports, the year has already been full of surprises for corn and soybeans — some bullish, but the latest ones bearish. Last week was especially bearish for row crops as unexpected rain across the Midwest and the U.K.’s vote to leave the European Union brought Dec corn down 54 cents and Nov soybeans down nearly 70 cents.

For producers, last week’s price declines were painful and put corn back at an unprofitable price for many. There is a good chance the third commandment was trampled across America’s fruited plain, accompanied by a lot of "could’ves" and "should’ves" as grain quotes turned red. Having witnessed numerous market disappointments like last week over the past 31 years, all I could think of was Yogi Berra’s quip that this felt like deja vu all over again.

If there is one thing I would especially like younger producers to learn from last week, it is that we should not be shocked when events turn out to be different from what people expect — no matter who those people are, how confident they may sound, or how many of them there might be. Life is simply not as predictable as many of us wish it were.

When it comes to marketing grain, I think producers are often too hard on themselves. Go to any meeting where other farmers are around and you’ll find some guy who farms more ground than you, gets better yields than you, and sold all his crops at the top of the market. Give it a little time however, and you may hear a different story as lucky streaks seldom last long.

My best marketing advice will sound boring to many, but it starts with good farm practices aimed at the long run. Take care of your soil, watch over your costs like a hawk, and learn everything you can about getting the best performance out of your crops.

No matter what anyone says about where prices are going, start every spring with inexpensive put options to take the risk of price disaster off the table. From there, you will be presented a variety of price opportunities the rest of the year and will need to determine ahead of time what prices are favorable for your operation.

Here is where it gets tricky. If I ask, "Do you want to sell your grain at a profitable price," you will probably answer "yes." If I ask, "Do you want to sell when the forecast is hot and dry and it looks like prices are going higher," you will probably say "no." Unfortunately, those two questions are often the same coin, which is why doing the right thing often feels wrong at the time.

As many surprises as grains have already encountered this year, there is one aid that has been helpful. If you recall, I compute an expected value range for Dec corn, Jan soybeans, and Dec Chicago wheat at the beginning of each year based on the historical relationships between prices and their variable costs of production.

Unless something unusual like drought happens, Jan soybean prices typically trade between a 20% premium and an 80% premium to their variable costs which in 2016, puts expected prices between $7.84 and $11.75 a bushel.

On June 8, Bryce Anderson and I pointed out in a closing market video that Jan soybeans were at $11.45, just 30 cents shy of the top of their value range. As it turned out, prices fell back after reaching a high of $11.82 on June 13. Given the unexpected surge of soybean demand that showed up in April, last week’s rain, and Thursday’s Brexit vote, the year has been unpredictable from analysts’ point of view, yet it is simply uncanny how prices have conformed to this historical relationship with their costs.

Shortly after the June 8 video, DTN Livestock Analyst John Harrington emailed me to ask about the value range for Dec corn. I was surprised to see that Dec corn had actually hit the top of its value range at $4.42 that day. The next day, I talked about corn on the closing video and also pointed at that the one-year high in Dec corn was offering resistance just shy of $4.47.

Don’t get me wrong. I don’t have a crystal ball and am not claiming to have called the tops in corn and soybeans, but I do want to emphasize the value of paying attention to the historical relationships between prices and their production costs. From an analytical point of view, there was no good advance warning of last week’s big drops in corn and soybeans, but that is often how these things go.

The summer is just getting started and there is plenty of room for more surprises ahead. Technically, Dec corn prices are still limited by their one-year high near $4.50 while soybeans remain in an uptrend. Thursday’s reports from USDA will provide more important pieces of this year’s puzzle, but don’t be caught off-guard if expectations are dashed again — that’s how this world works.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman1

(SK/CZ)