Risk management with a marketing plan

By Jon Scheve, Superior Feed Ingredients, LLC

The market has slowed its upward movement as South American weather has seen adequate precipitation and Chinese purchasing has been less active. Ethanol may be running into some profitability issues as well. 

On a positive note, funds have reduced their long bean positions by 30% and the market only pulled back 50 cents. Should the funds find a reason to add more length to their positions it could cause a strong rally.

Risk management

Every farmer wants to sell 100% of their crop at the top of the market each year. However, having this as a marketing strategy goal is unrealistic. Working in the grain trading industry over the last 20 years, I’ve yet to meet one person who can do this year after year. In general, I have found the best trading strategies work well 70% to 80% of the time, while the worst strategies work best about 10% to 20% of the time.

In other words, the best marketing strategies sometimes come up short and the worst strategies occasionally hit home runs. 

Having a plan

Rather than trying to guess, or “go with a feeling”, of when the top of the market will happen each year, I prefer to use historical demand trends along with average yield production data to develop a grain marketing strategy. This helps to prioritize the minimizing of risk exposure, while leaving some upside opportunity open.

Unpriced crop and risk in 2020

I sold the first 20% of my 2020 corn crop at $4.14 when corn rallied in the summer of 2019. With the destruction of prices from the pandemic I did not make another 2020 sale before late June, because I hoped something would turn the market around. Over the last 30 years, the market high for the year has been between March and August about 75% of the time. 

That is why my goal is to be nearly 80% sold for the upcoming harvest by July 4 each year, and if possible, start selling some of next year too. However, this year was different, as I still had some of the 2019 crop left to price, along with most of the 2020, and all of 2021 crops. The following was my unpriced positions still open at the end of June:

  • 20% of 2019 corn
  • 25% of 2019 beans
  • 80% of 2020 corn
  • 100% of 2020 beans
  • 100% of 2021 corn and beans.

With December corn on June 29 trading $3.25 and November beans trading $8.65, my risk was extremely high the market would trend lower through summer or longer, with so much of my grain still unpriced.

Market conditions indicated a rally was unlikely

With a record corn carryout expected, widespread good summer weather until the middle of August, and a significant ethanol demand reduction in place, it seemed at the time that corn rallying to $4 was very unlikely and that going below $3 was a real possibility. Also, $8.65 bean prices at the time made $10 seem like an impossible dream for 2020.

It would have been hard to find any farmers between March and the end of September who would not have been thrilled to sell their entire 2020 production for $4 corn and $10 beans if given the opportunity. 

Price potential and risk concerns

While I had a timeline to finish my 2019 corn sales by July 15, I was concerned about my remaining 80% of unsold 2020 crop. In the last 25 years, the year’s marketing high has only hit between late September and December 10% of the time. Because of the substantial carryout predictions in the marketplace, I wanted to put a plan into action that maximized my price potential before harvest, when prices usually start to trade sideways or decline.

My marketing plan

Over the last 5 years, the average corn price on nearby futures has been about $3.65. I placed trades on nearly 70% of my crop with sold options that would ultimately leave me just under 90% sold at $3.80 against March futures.

I placed these trades to expire during harvest when lows usually occur (90% of the time). With what I knew in July and August, I would have been thrilled being sold at $3.80 with the trades I put in place. I was expecting prices to continue mostly sideways or lower, which would have allowed me to collect premium that I could later add to trades on a post-harvest rally. Setting up trades to be more profitable in a sideways or down market, meant it would limit my upside potential if the market significantly rallied. Given market conditions at the time, a big rally didn’t seem plausible, so this plan seemed like my best option.

Off setting the corn position with my bean position

Since I limited my upside potential in corn, I choose to leave all my bean positions alone, which allowed for capturing upside potential there instead of with corn. I was comfortable doing this because:

  • If corn prices improved, it would likely be due to a bean price increase
  • There had been reductions in planted bean acre estimates in March that were not changed at the end of June
  • Increased Chinese exports from the Phase 1 trade deal still seemed plausible
  • Beans had traded above $10 in 11 out of the last 12 years so the odds favored a bean rally
  • In August, the price ratio of beans to corn was 2.65:1 (that is figured by taking November beans at $8.65 / $3.25 December corn = 2.65). I estimated if corn rallied to $3.80 during harvest, and beans were still trading at a 2.65:1 ratio with corn prices, bean prices would be just over $10. Also, if there were any August bean production issues price could push the ratio closer to 2.8:1 or 3:1. This meant if corn managed to hit $4, beans could be at $11 or $12.

In other words, I figured if I missed out on a big corn rally, I could make up for some of it on beans. I still had 25% of my 2019 bean crop and 100% of my 2020 and 2021 beans left to sell. During July and August beans struggled to find $9 and there was fear that beans could trade below $8 before the end of the year. There was downside risk with this trade strategy but I felt comfortable with it since I had a plan with the corn.

Bean sales

I am pleased I was able to finish my 2019 bean crop with the final sale at $10. I also sold the first 25% of my 2020 and 2021 crops at $10 during harvest, which seemed unattainable long-term a few months ago. I then sold another 25% of my 2020 crop at $11.90 the other week, so I am 50% sold at a $10.95 average for 2020 so far.

I am meeting my grain marketing goals for the year

Eight months ago, I, along with many farmers likely, had an aspirational goal of $4 corn and $10 beans that seemed unattainable. Four months ago, those goals did not seem possible. However today I still have the potential to meet my goals despite being sold at $3.80 corn, because of my bean sale strategy that allowed for unlimited upside potential.

I raise nearly 5 times more corn than beans each year. So, if I sold my remaining 50% of the 2020 beans for $11 (the market is well above that today), I am $1 above my $10 bean goal from the summer. If I take that $1 per bushel bean profit and divide it by all my corn bushels ($1 per bean bushel divided by 5 corn bushels = 20 cents), and add it to my $3.80 corn price, I get $4.00. So basically, I am meeting my grain marketing goals for the year when both beans and corn are combined. 

The average farmer is probably around 3.5 times more corn to beans if we assume a 50-50 rotation with national yield averages of 175-bushel corn and 50-bushel beans. So in this case the average farmer could take the $1 per bushel and divide it by 3.5 and come up with a premium of 28 cents to add on to their average corn sales.

Keeping perspective

Obviously, by mid-October my grain marketing goals were looking to be set too low, but in mid-summer I still had downside risk for both corn and beans with market conditions and historical trends suggesting a late-year rally would be very unlikely. My grain marketing plan gave me the chance to increase my overall sale price above the levels being traded in mid-summer, and I left my beans open to unlimited upside potential to take advantage of an unexpected rally.

In hindsight, the more profitable marketing plan this year was to have no plan at all. Sometimes not having a plan works out. However, over the long run the strategy of having no plan has been less profitable than having a grain marketing strategy, based on historical trends and average/normal conditions. 

Please email jon@superiorfeed.com 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.

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.

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