By Jon Scheve, Superior Feed Ingredients, LLC
Given current perceived carryout estimates, corn prices seem a little high for the start of harvest. While some suggest carryout could fall to levels similar to the past couple years, it will likely take more demand or a big supply reduction to keep prices as high as last week until after harvest.
The bean market has been running hard and is finally getting tired. It needed to pull back some. Exports have been good, but they will need to continue to be strong. Focus will start to shift to weather in South America very soon.
What is in your toolbox?
This weekend I was on the farm helping with harvest. While fixing a broken sickle, I looked inside the toolbox at the many tools we carry on the combine to fix potential problems in the field. It reminded me of all the grain marketing tools we use to price the grain we are harvesting.
Just as most farmers know how to use their tools and wouldn’t go to the fields without them, farmers should be knowledgeable about the grain marketing tools available to them too. Unfortunately, some farmers are not.
For example, not using futures is like going to the fields with only a hammer, screwdriver, vice grip and crescent wrench. They will be able to fix some problems, but they would be more effective and efficient with a more diverse toolbox. Let me explain.
It’s easy to understand what will happen when you use it, but it doesn’t offer many options. Hit something just right, and all problems are solved. But, swing too hard, or in the wrong spot, and you can break something. The hammer is like Selling Cash Grain. Every farmer knows how this will work because it’s 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 also an easy tool to use but 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. It’s 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, but it won’t fix everything.
The Crescent Wrench
When you aren’t sure what size of bolt you’ll need to loosen, the crescent wrench can come in very handy. However, if the bolt is too tight, you can round off the corners 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 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. For example, in less volatile markets options can cost farmers more than they can potentially gain from them.
The Vice Grip
The vice grip is a companion tool. It can keep your fingers safe holding a nail when using a hammer or it can hold a nut in place when screwing in a bolt head with a screwdriver or crescent wrench. This is like Forward Selling Grain to an End User. It can be handy on its own or used with other tools (i.e. Hedge to Arrive, minimum priced contracts, or deferred pricing). However, just like the name “vice” suggests, it can also lock you in tight with limited options when there are production issues or other end users have higher basis levels when it’s time to move the grain you sold. Flexibility is usually limited.
What’s in my toolbox?
Obviously, I have the above tools in my toolbox, but I also have other tools available to me that better fit more grain marketing situations.
I have a complete standard and metric socket set with extensions that fit any bolt needing repair. Futures, like sockets, provide flexibility to pick the exact price I want to sell. 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. Extensions are comparable to how futures allow me to take advantage of basis opportunities. These extra tools may be heavier to carry, keep organized, and be more complicated, but the flexibility of what I can do and how much I can fix is worth it.
Open-Ended Box Wrenches
Sometimes sockets don’t fit, and I need an open-ended box wrench to reach a difficult bolt head. While not as quick as a socket, it can be the perfect tool for a very specific, tricky fix. This is like using straddles in a sideways market. While I may not use them all the time, these types of trades can generate a little extra premium when futures aren’t meeting profitable price points.
Like using a socket on one end of a bolt and an open-ended box wrench on the other, straddles can easily compliment futures trades.
Sometimes a little extra help is needed to loosen tight bolts. This is like selling calls. When things are tight and none of the other tools are working, a little extra premium that I can pick up and add to a future sale is sometimes 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 toolbox. Your grain marketing toolbox should be just as diverse, so you can take advantage of every opportunity and challenge you will face.
Please email firstname.lastname@example.org with any questions or to learn more. 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.
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