Yield estimates on last week’s USDA report were as expected, while harvested acres increased slightly. With this report the likely trading range could be $3.20 to $3.60 through Dec 2016. There was a surge in prices late this week, but I don’t expect it to continue. As prices increased, basis levels began slipping across the Corn Belt, indicating farmers are willing to sell.
Little new crop has been priced, so even the smallest rally will encourage farmers to sell some corn. End users seem to be willing buyers under $3.30. So, $3.40 may be the fair market value over the winter.
There were no surprises in the report for beans. Right now the market is determining the necessary premium when considering South American weather. Good to average growing conditions would mean levels are overpriced and will need to go lower. Add this to many farmers planting more beans in 2017 and there is potential for substantial downside risk long-term. Without a weather issue in South America it’s doubtful beans will rally above $10 in the near future.
What is in your tool box?
I’m amazed how many farmers are still reluctant to use futures in their grain marketing. Not using futures is like going to the field with only a hammer, screwdriver, vice grip and crescent wrench in the tool box. Can you fix a problem in the field with these tools? Yes, but how effective are you and how successful will you ultimately be?
It’s easy to understand what will happen when you use it. But, it doesn’t give you very many choices. Hit something just right, and all the problems are solved. But, swing too hard or in the wrong spot, and you can break something. The hammer is the equivalent of selling cash grain. Every farmer knows how this will work. They have had successes and failures in the past, but it’s pretty easy and takes little skill. Selling at the right price at the right time (a direct hit) feels great. But, selling at the wrong price or time is hard to fix and causes frustration.
The screwdriver is an easy tool to use, but very limited in function. It can be very useful in the right situation, but unless you have the right screw or bolt, this tool may not be the answer. This is similar to just counting on insurance revenue programs or government payments to help set a floor price or make up for any short fall in prices. It’s an indispensable tool, you can’t live without it, and easy to use, but it won’t fix everything.
The crescent wrench
When you aren’t sure what size of bolt you need to loosen (or maybe you have a surprise metric bolt you have never encountered) the crescent can come in very handy. However, if the bolt is really tight you can round off the corners of the bolt or nut, and be in an even worse position. This is similar to buying a put or call option. There are times buying a put or call can be just the right “tool” in the marketing world. However, there are situations where it doesn’t work as well, or makes a problem worse than when you started. In less volatile markets like this previous year, options can cost farmers more than they can potentially gain from them.
The vice grip
The vice grip is a companion tool with any of the above tools mentioned. You can keep your fingers safe using a vice grip to hold a nail when using a hammer. Or a vice grip can work with a screwdriver or crescent wrench to hold a nut in place when screwing in a bolt head. This is like selling grain to an end user. It can be handy on its own, or use it with other tools, like Hedge To Arrive, minimum priced contracts, or deferred pricing. However, it can lock you in tight, leaving you with limited options. What if there are production issues? What if there is another end user paying more in the future? Flexibility is limited sometimes.
What’s in my tool box?
Obviously, I have the above tools in my tool box, but I also have other tools available to me that best fits each situation the grain market throws at me.
I have a complete standard and metric socket set that fits any bolt in need of repair. I want all sizes and extensions available for the right task. Futures like sockets give me flexibility and allow me to pick the exact price I want to sell grain at. Deep sockets are like using deferred contracts that allow me to sell late in the year and pick up market carry. Different drives are like futures contracts that allow me to pick the right year to market. All the extensions are equivalent to how futures allow me to take advantage of basis opportunities. While a little heavier to carry, keep organized and more complicated to use, the flexibility of what I can do and how much I can fix is worth it.
Sometimes a little extra help is needed to loosen tight bolts. This is like selling calls. Does it work all the time? No, but when things are tight and none of the other tools are working, sometimes a little help is all that’s needed to get the job done.
Next time you knock a sickle out while cutting beans, or have to fix a broken gathering chain on the corn head, ask yourself what tool will do the best job and what do you have in your tool box.
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 firstname.lastname@example.org.