Tips for sleeping well when markets are a nightmare

The EPA released their ethanol and bio-fuel requirements last week and the estimates were close to expected results, so the market changed very little. Nothing else big happened, which made the market a little painful to watch as it generally drifted lower. Curious, I reviewed what I wrote a year ago to see if I could gain any insight. Interestingly, nearly every bullet point I wrote last year this week is relevant today except:

• Prices are $1/bu less
• Instead of last year’s PED virus, this year we have the bird flu.

No two marketing years are exactly the same, but it does seem that history may be repeating itself….

Here is my Market Commentary for May 30, 2014

Corn

The planting progress compared to the last five years is on schedule and weather conditions across the Midwest have been good this week. The following are trends to keep an eye on:

• End users have good coverage on through June-July, so don’t expect a rush to purchase August/September. The end users know that time is no longer on the side of the farmer.

• Finished planting, farmers are looking for the opportunity to sell $5 corn again. But, without a weather scare, it is unlikely. A rally to $4.90 would be nice though but it’s not a given.

• The corn board is showing technical signs it doesn’t want to rally. The market is showing a downward trend with July below $4.80. If prices break $4.60 it could grind lower as funds could sell out quickly.

• Export demand is good, but not strong enough to meet supply still in farmer bins. Several elevator managers across the Midwest say a few farmers will hold corn waiting for $5 into new crop. If true, this could cause logistical issues at harvest.

• Ethanol corn demand has been tricky. It has been strong and profitable, but some traders are suggesting that the amount of bushels being used could be only 95% of USDA estimates because refiners have become more efficient at the process.

• The news in livestock is the PED virus shows no sign of being contained. Many wonder if this segment will use all that’s been estimated. One positive, feed ingredients remain strong relative to corn prices and the CA/TX Panhandle droughts are helping with demand.

Corn values between $4.60 and $4.80 is not a sale or a buy. The market is looking for direction. There is still significant premium built in for the chance of some dry weather. Some have floated a national average of 170 per acre, while possible, I think it’s a bit early to know (it’s still May on the calendar). Remember the market will know what is going on in your fields before any of us truly have a handle on it. That is why it’s always a good idea to sell traditionally good values. That means looking back at 5- and 10-year averages, rather than using the mindset — “the market has to go up.”

I have my prices in place with potential for some adjustments for the next two years. I’ve reviewed my farm operation expenses and understand the profit margins based upon these prices against yield averages/ranges. I have looked at historical markets and trends. At this time I’m not predicting another 2012 situation. I’m planning on the historical average where 80% of the time the market goes lower through summer. I’ve reduced risk and I know I’m profitable for the next two years. If we get a drought and prices rally I’m happy with that because that will allow me to price 2015 and put protections in place for 2016.

Reducing risk is the most important thing in my operation and my marketing strategy. My goal is not to pick the top on in the futures market, although it’s on my wish list every year. My strategy is to never wonder if I’m going to be profitable because of market conditions. Based upon 10-year yield results I know I am through 2015. I sleep very well at night…well until my 15-day old baby cries at 1am and again at 4 a.m.

2015

I am surprised by all the similarities between this year and last. (Even my now one-year old had an ear infection this week, which kept me up last night.)

What do you think is going to happen?

I have 100% of my 2015 crop priced with futures at $4.71. I also have a good start on our 2016 crop priced at $4.65. Ideally, the market will rally, so I can sell more 2016, but I’m not sure that will happen.

Another huge crop like last year, could create even bigger corn carryout. Many say this can’t happen, but the technology in those $250 seed bags is getting better and better every year. Our farm has seen tremendous yield growth the last two years (during good weather conditions), so I think it’s certainly a possibility. However, it’s still early, anything is still possible. I mean, $3 corn is possible if conditions are right and if they aren’t well $5 could still be in the cards

Farmers need to focus on reducing their risk

While weather conditions change and market prices move unpredictably, one thing that is consistent year to year in our marketing strategy — reducing our farm operation’s risk and staying profitable. My goal each year isn’t to pick the top of the futures market (even though I try to). My goal is to never worry if the farm will be profitable due to shifting marketing conditions. Historically, 10-year yield result averages indicate I will be profitable in 2015. So, I sleep very well at night — when my little kids let me.

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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