Feed Buyers to Take Action
There’s an old saying, “the trend is your friend.” In the case of feed prices, this is the mantra for feed buyers as prices continue to trend lower. Typically, grain prices will establish a low sometime during the fall harvest when supplies are perceived to be their largest. However, in late 2023 and early 2024, the crop size has increased (November and January USDA reports), while world demand remains mostly stagnant on economic concerns. This has led to lower feed values for end users and an opportunity to lock in longer-term needs. This may be particularly important as key weather in the Southern Hemisphere will determine crop size in the weeks and months ahead.
Why this is important…
How low can prices go? March corn futures have dropped over $0.80 since October. It is likely they are reaching a point where downward momentum will slow. No one knows for sure. From an end user perspective, recognize that the March corn futures prices near $4.45 suggest that most corn producers are not making money. This means that, as an end user, you’re able to buy supplies at or below the cost of production. This would be termed a bargain on most accounts. However, don’t get complacent if you’re a feed buyer. Markets change and are always fluctuating.
What can you do?
Three strategies to consider in shifting risk are to forward contract, buy futures, or buy call options. For forward contracting, consider multiple months’ worth of feed needs. You might go as far out as the end of 2024 or even early 2025. The idea of having the corn producer pay storage and interest is appealing to the buyer. In addition, prices are now low enough that forward contracting provides security of knowing you have a price locked in. This is the bird-in-hand theory. A second strategy is to buy futures and have the flexibility to exit as desired. This is a position that requires margin and does not lock in cash prices. The advantage is when (or if) cash prices continue to weaken. In that case, you can buy the physical feed as-needed and you’re ultimately protected to the top side through your futures contract. A third strategy is to purchase call options. The buyer of a call has the right (not the obligation) to own futures. Your risk is premium paid plus commission and fees. You could purchase call options for the rest of 2024, staggering them with different contract months to cover appropriate time periods.
Strategy is key to shifting risk. Trying to outguess the market can be a challenge. With a significant sell-off and now an opportunity to move into a less risky environment, feed buyers are in a position they have not experienced for several years. In the futures and options markets, managed money (large speculators) remain in a record short position as measured by the weekly Commitment of Traders report. The risk to buyers is managed money exiting. That move could quickly push prices upward. A catalyst to create a fast exit could be less-than-ideal weather in the Southern Hemisphere. Currently, projections are beginning to downgrade the Brazilian bean crop due dry weather. Now is the time to have a conversation with your advisor. Consider having positions in place to take immediate action on market moves. Become familiar with the risks and rewards and select a strategy that works best for you and your operation.
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.
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