Market history shows there is no certainty in the future

As they say in the North, “winter is coming.” Last weekend I mowed the yard at 60 degrees. Today it is 32 degrees and snow is on the ground.

Harvest is mostly done. At this point the market will have to rally to get farmers selling, because bins are closed and locked tight. Seasonally the market tends to rally from Mid-November through Christmas.

Many now wonder how high markets can go considering how much grain was produced. The dollar strengthened last week, which long-term may slow export demand. Corn is now trading in a tight range between $3.40 to $3.60. Beans are holding at $9.80, but may retest $10 soon. It’s hard to tell if beans will push above $10.20 on the Jan. It may take a weather issue in South America to get the prices to rally above that level.

 

Bean Marketing

Beans have had a wild and unpredictable ride this past year.

  • Dec ’15 – With harvest over, many expected the largest carryout in recent history. Prices began to decrease.
  • Jan ’16 – South America was pacing to produce a record bean crop, which caused prices to fall further.
  • Mar ’16 – As South America’s harvest approached, there was so much rain, farmers couldn’t get beans out of the fields. This reduced yields and caused the market to rally.
  • Apr ’16 – Frightened world buyers were worried about supply issues and began buying all the beans they could from the U.S. Prices increased further.
  • May ’16 – El Niño caused a widespread drought in Indonesia, where most of the world’s palm crop/oil is grown. This increased demand for soybean oil and increased prices further.
  • Jun ’16 – Drought concerns and rumors began to run rampant throughout the U.S. Fear pushed prices up even further.
  • Jul ’16 – U.S. weather forecasts abruptly changed as drought was no longer a concern. Prices fell quickly.
  • Aug ’16 – Yield estimates continued to increase more and more, and prices continued to fall.
  • Oct ’16 – Yield estimates were confirmed, it was a record crop. Prices surprised many and rallied
  • Nov ’16 – Drought worries in South America and increased demand for soy oil to replace palm oil is still present and keeping prices strong.
  • Today – reports indicate 4 to 5 million corn acres may switch to beans in 2017

 

Why the history lesson?

The above list of global factors affecting bean prices last year illustrates how easily and quickly bean prices can change based upon unforeseen circumstances and irrational behavior. Some of these factors, like drought concerns often cause price volatility. These events can range from the droughts in Indonesia impacting the palm oil market or the lack of weather problems from La Niña, which are completely unpredictable. In fact, most “experts” and analysts were completely wrong last year. No one predicted the “perfect storm” the 2016 bean market encountered. The point is, predicting future prices with any accuracy is impossible.

 

The importance of understanding breakeven points

On average I estimate farmers need about $4 corn futures and $9.75 bean futures to breakeven.

Today bean prices are at a level where nearly all farmers can lock in profits for both the 2016 bean crop just harvested AND the 2017 crop next year. Beans are the only major crop right now where that is the case.

Many farmers think there is more potential in the market and are going to wait to sell. I hear so many farmers saying, “But it rallied $3 per bushel last spring, it will probably do that again. I mean why are prices increasing after a record harvest? I’m going to wait to sell.” History shows us that no two marketing years are the same. The reasons for last year’s rally do not have to repeat.

I certainly want the market to rally even though I have sold much of my 2016 and 2017 crop. However, there are two scenarios that concern me. One, if bean prices are the only profitable crop, it’s reasonable to assume more bean acres will be planted next year. Every farmer I have spoken to tells me they will not plant more corn in 2017 than they did in 2016. Two, there may not be a weather scare in South America and yields could be normal. I always ask farmers to think about what would happen if they are wrong about prices going up.

 

So, what is your plan?

It’s hard for me to not sell beans right now knowing that prices are at profitable levels (while corn is not). If I wait and prices end up going lower, I may put myself in a position where I’m unsold in both corn and beans while prices sit at unprofitable levels. This increases my farm operation’s risk, which I am always trying to avoid and minimize.

After an acreage shift on our farm, I have 75% of my 2017 beans hedged with only 5% of my 2017 corn. With what I know today, I want to minimize risk and protect my profits by selling some beans now while I wait for corn to return to profitable levels. Like in baseball, right now I’m just looking to get on base to start scoring some runs. A home run would be great, but I can’t afford a strike out. So, I’m playing it a little safe and going with the sure thing.

I have been suggesting to producers to have orders in place for Nov ’17 futures. If $10, $10.50 or even $11 is the price you want have the orders in because as history has shown us the market can lose value very quickly.

Keep in mind, while I have sold quite a few of my beans already, I always try to structure my marketing plans to consider all potential scenarios. Therefore, if prices continue to increase above $10, which I think could happen, I still have more soybeans I can sell in the future. Remember, as a farmer I will always have more grain to sell eventually.

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