TOP FARMER WEEKLY PERSPECTIVE 03/25/2022 BY BRYAN DOHERTY
As the War Unfolds
The heartbreaking and devastating photos and videos out of Ukraine are moving and telling a story of a planned and malicious attack. What the end game will be for Russia is unclear. In the short-term, chaos continues to ensue. What might it mean for global food supplies and why it is important to U.S. farmers?
Ukraine is an important supplier of grains and oilseeds to the world. They are the leading exporter of sunflower oil and at least fourth in world corn exports. Soybean and corn futures have reflected the growing concern of supplies stuck in port and the real potential of a shortfall in production in the year ahead, as the planting season is just around the corner. The importance of Ukrainian corn production to the world cannot be underestimated. Ukraine exports nearly 80% of its production, which implies that over a billion bushels are at stake. By comparison, the U.S. is expected to ship 2.5 billion bushels this year and leads the world in exports. Projected carryout of U.S. corn supplies is 1.440 billion bushels, an already snug figure. If buyers come to the U.S. to make up for a Ukrainian shortfall, U.S. supplies could be historically small.
Simple math suggests world corn supplies will tighten, and the market’s job may be to ration inventory. Export sales for old crop corn (last year’s production) hit a record high 80 million metric tons two weeks ago and 72 million last week. End users are buying. December corn futures prices exceeded $6.50, historically a high price, and may not be high enough. So much is riding on the next two months of planting progress in Ukraine. With the war continuing, fuel shortages and other logistical issues including farmers fighting the war, it seems unlikely this will be a normal year.
End users should take notice and book new crop supplies. Consider buying a December put against these inventories. Yes, puts are expensive compared to normal, less volatile times – and these are not normal times. By booking your needs, you at least have a contract and are in line for delivery. If a Northern Hemisphere weather event limited crop production, contracts may not be available.
Producers need to walk the fine line of selling ahead and covering sales by purchasing calls. It might be a challenge to implement this strategy with so many variables pointing to higher prices. Still, as we all know, market sentiment can quickly change and so can news and events. Strategy is paramount. We have heard for months now that prices will be volatile. You can do nothing and hope for the best or strategize. Only time will tell which will turn out the best. Doing nothing is considered an extreme with potentially extreme results. If strategizing, have detailed conversations with your advisor on how to implement and manage your positions. Pre-plan your entry and exits and know with some realistic expectation your expected results. You can’t outguess weather or politicians or how a war will progress or end. You can, however, use marketing tools to manage these uncertainties.
Before entering into any position, talk to your advisor. Review opportunities and risks presented by these prices, and what they may mean to your operation.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
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.
Author
Bryan Doherty