TOP FARMER WEEKLY PERSPECTIVE 9/17/2021 BY BRYAN DOHERTY
Fine Tuning Yield
It is amazing to think about the planting process. In spring, you plant a seed the size of your pinky fingernail. About 100 days later, you have this magnificent plant. You plant 30,000 to 35,000 seeds and produce countless kernels per acre. Now consider all the factors to get this seed to a full plant, including weather, weeds, and disease. Also, realize this process is repeated roughly on 90 million acres nationwide. It’s staggering to expect that, on such a widespread scale, final crop yield/production is accurately predicted within small percentage points of deviation, even before the crop is planted. In August, the national yield was forecast at 174.6 bushels per acre. In September, this rose to 176.3. The differential of 1.7 bushels per acre equates to a change of less than 1%. Is it possible that such small changes in forecasts can be that accurate? History would suggest probably so. This year could be different.
There’s an old saying: big crops get bigger and small crops get smaller. What does that mean for this year when 15% of the crop is rated as poor to very poor, about 10% higher than usual? It likely implies that accurate yield prediction will be challenged, and harvest results will be the key to price direction. Yield results will vary across the Midwest more this year, due to significant challenges faced by many this growing season, especially in the western half of the Corn Belt. Low subsoil conditions and continuous bouts of hot and dry weather in that area impacted growth and maturity. The September USDA yield forecast included objective yields (actual counts), farmer surveys, and satellite imagery combined. In theory, this is the most comprehensive collection of data. Best guesses are formulated with very technical math models. Still, with such widespread weather issues and other late-season variables such as tar spot, final yield could be impacted more than usual. Additional data will be analyzed in October, November, and again in January when the final yield estimate will be “in the books.”
Both end users and producers can and should manage for the unexpected. The incredible and highly predictable corn plant would suggest that producers are wise to manage their downside price risk. This can be done by using forward sales, hedging, and purchasing puts. We like the put strategy this year, as it provides a floor for prices and still leaves opportunity for upside price appreciation.
End users should recognize that many of the challenges faced by this year’s crop might show up in lower yield results. Practices to consider are booking needs now and buying a put to manage the risk, or hedge through futures positions. You can also consider fixed-risk positions with unlimited downside price potential (to cheapen your cost if prices drop), then purchase call options to provide a price ceiling (just the opposite of purchasing puts).
There are many different tools that can be used to work toward your goals. Visit with a trusted advisor to design a strategy that works best for your operation. No matter your strategy, be sure to understand the risks and rewards.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, extension 300.
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.