Price Versus Value
What’s Happened….
In early 2023, corn and soybean futures prices for the upcoming crop were trading at levels that, today, may cause farmers to salivate. At that time, many producers decided to pass on pricing new crop because of the significant discount to the 2022 crop available and in storage. An inverted market (nearby prices higher than deferred) was dominant. Prices reflected tight supply and good demand for the 2022 crop. However, despite trading at a discount, the value that was available for 2023 expected production was also historically high.
Why is this Important….
It is important to recognize the difference between price and value. Price is relative to something. In most cases, it is measured against the cost of production or where prices just came from – the most recent price. A year ago, cash prices for 2022 were historically high, offering profits and value for most. At the same time, 2023 deferred futures were trading at a discount. By many accounts, this created a disincentive to sell. Yet, the market still offered value. So, what is value?
Value is what your commodity brings to the farm operation in terms of cash flow and potential profits. If value exists, then strategies to shift risk should be considered, regardless of price. In the case of 2023, corn futures were trading above $6 for months in the fall of 2022 and early 2023. However, $6 was well below cash current cash prices. There may be a lot of good reasons why farmers did not sell much ahead. The inversion of prices and dry weather maps suggested a chance for higher prices. Many farmers may now admit they didn’t measure the value that $6 board prices would bring. Was greed part of it? Maybe, though not as much as the likelihood that good cash flow from 2022 created a comfortable atmosphere, suggesting prices for the upcoming crops would hold or improve. Neither happened. The rationale for weaker deferred prices was simple. The market expected lower demand and more production (both due to high prices). In the end, both occurred, creating a long-term downtrend for prices. Currently, those who buy corn are offered value, as the cost to produce a bushel of corn is higher than the cost to buy one. This price scenario may be considered a bargain. Bargains are generally short-lived.
What can you do?
Farmers who produce commodities wear a couple of hats. You are a producer and marketer. Marketing is always there; it never goes away. Stay vigilant and watch for opportunities. Many thought the price of deferred futures was too low because they analyzed the price of one crop relative to another. Measure each crop year differently. If value presents itself, then act. Take time to learn marketing tools so you can use the right tool at the right time for the right reason. Communicate with people who can help you achieve your goals. Ask your advisor to help you determine what a good value might look like. Then, create a strategy to keep value in your favor.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
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Bryan Doherty