TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
USDA REPORT AS EXPECTED, AND NOW IS THE TIME TO PREPARE
The USDA February 11 Supply and Demand report, as expected, had little surprises. By day’s end, the report left the market with one of the more uneventful and quiet finishes in recent memory. Projected carryout for corn was left unchanged with only minor revisions. Soybeans could be considered slightly supportive, as carryout was reduced 51 million bushels from the January estimate. World ending stocks increased 2.2 million metric tonnes, close to 80 million bushels. There was little expectation the USDA would make adjustments based on the Phase 1 agreement with China. Should both sides continue to move forward with the agreement, those adjustments to demand will likely show up in the May Supply and Demand report. This is according to the USDA office of the Chief Economist on a February 6 report titled: Agriculture Provisions of the U.S.-China Economic and Trade Agreement and USDA Trade Forecasts.
Perhaps the more obvious (or important) question is: Does the February report really matter? In the long run, probably not. From a perspective of managing the numbers on a 30-day basis, the USDA does have the ability to respond and react to different occurrences, particularly weather developments elsewhere in the world, along with perceived demand changes. Moving forward, the key variables that will impact prices are weather and political developments. So, while the February report didn’t provide much direction for prices, it indicated that expected world supplies are currently considered ample. As 2020 unfolds, future monthly reports could change dramatically. China is expected to spend perhaps 35 billion dollars within the next 12 months. Add to that potential weather scenarios in the U.S. and abroad, and the quiet markets of February could become highly dynamic.
As an example, if China were to purchase an equivalent number of soybeans from the U.S. as they did in 2017, carryout could drop to less than 100 million bushels. This could create a rationing effect and drive prices substantially higher. Add to that weather uncertainty or other production uncertainties, and speculative money could pour into the bean market. The key for you is to be prepared.
Farmers who are balanced in their marketing approach will be ready for high volatility. They will also be prepared for the fact that the world is adept to producing big inventories. Crop production has soared in recent years, which implies record supplies could also be on tap in 2020. This could mean sharp downturns for prices. Producers will need to be shrewd in making appropriate sales to matter, should rallies be short-lived. The key is to make sales at target points above current prices. These sales can act as a pully to “pull” up your sales average, should prices move lower by fall.
What happens if target points are hit, sales made, and then prices spiral upward? Volatility is historically low. Now is the time when prices are in a low price range, with little news occurring day to day. Call options are cheap relative to a high volatility window. You can buy ample time to cover forward sales or retain ownership of old crop. Prior planning prevents poor performance. Spend February planning for the year ahead, and let the market go where it may. If you have your plan in place, it should (for the most part) take care of itself.
Be sure to consult with a professional before entering into any positions. Understand the risks and potential rewards of your marketing decisions, and how they may affect your operation.
If you have questions, comments or would like an idea for your farm, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.