TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
PAY ATTENTION TO DECEMBER 2020
Even though harvest is just getting underway for the 2019 crop, now is the time to pay attention to 2020 crop pricing opportunities for corn. Currently, December $2.20 futures are trading near $4.08. This could be attractive if acres and yield in the year ahead increase. Expectations are that producers will likely plant more corn acres, as soybean futures for November 2020 are not competitive enough. The current futures price ratio of soybeans to corn (soybeans divided by corn) is 2.3, not attractive enough to sway corn acres to soybeans. Though planting decisions are a long way off, be vigilant in watching for value opportunities. (We’ll term value as sales that will either be profitable or at least break even.) Each year, most producers make a spectrum of sales. By selling early and in small increments of expected production, you begin a process of shifting risk.
What might the year ahead hold for 2020 corn production? World supplies are ample enough. African swine fever concerns continue to surface, and could cause a decline in the world corn demand. South America, Eastern Europe, and Russia continue to add production capability. The consequence could be an export competitor to the U.S. Domestically, soybean prices are not offering enough to suggest more acreage of soybeans. December 2020 corn futures have been range-bound, trading for months between $3.95 and $4.20.
“Sell early and sell often” is the mantra that has been beneficial to many producers, particularly in years where big supplies lead to lower prices. Usually the market will price premium well in advance of producing the crop. Once the growing season gets underway, and without any weather problems, futures prices tend to work lower. Use history as your guide. In most years, futures lose at least $.75 after they peak.
How would one go about selling early? Perhaps the easiest way is to hedge the futures market. You would do this with a market advisor who is licensed and can place an order to hedge on the Chicago Board of Trade. Put options are a method to ensure a market floor. With options, the more time you buy, the more premium you pay and, consequently, cost can become prohibitive. Through a grain elevator/buyer, you could use hedge-to-arrive (HTA) contracts. Keep in mind there is generally a cost to HTAs when reaching out multiple months, and you are committed to make delivery. Forward contracting is an alternative as well, yet basis and commitment to deliver are important items to know before entering into a contract.
Whichever strategy you choose, make sure you understand the risks and costs involved. Know what to expect before implementing any strategy. Be vigilant in watching for opportunities. Be aggressive and take advantage of prices when the value proposition exists. Have confidence in your ability to produce and, therefore, confidence in your ability to sell early and perhaps often.
If you have questions or comments, contract Top Farmer at 1-800-TOP-FARMER. 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.