TOP FARMER WEEKLY PERSPECTIVE 10/1/2021 BY BRYAN DOHERTY
Input Anxiety and Acres
Harvest is in full swing, yet many farmers have been faced with decisions regarding locking in fall or even spring fertilizer prices. December 2022 corn futures are currently trading above $5. Factoring in soaring fertilizer costs, this isn’t high enough to make it financially viable to lock in a gain for many producers. Anxiety is rising and easy decisions are not surfacing. Add to that a growing concern that fertilizer, like so many other products, could face supply shortage by spring. World supplies are being stretched. Continued concerns on moving products around the globe have many suggesting the supply pipeline will not be fully intact by spring delivery. Bottom line, events are unfolding and suggesting the year ahead may be anything but normal.
So, what does this mean for commodity prices? From the perspective of an end user of corn or soybeans, it raises the possibility that prices will need to move higher to encourage farmers to plant more or anticipate prospects for smaller yields. Currently, the ratio of November 2022 soybeans futures price divided by December 2022 corn futures is near 2.5. Typically, this would be a signal for producers to plant more soybeans. More importantly, what if the availability of fertilizer is limited? Will this mean less application by farmers, less acres, or both? These scenarios likely point to higher prices. From a producer’s perspective, concerns of chasing high fertilizer prices, only to find it was a temporary issue, is a near worst-case scenario. If high fertilizer prices are locked in, and the world responds to higher prices by increasing supply, substantially lower prices could exist by next fall. No doubt, a lot of concern is being experienced by all parties, with no easy answers.
Marketing of crops is rarely an easy event and is usually done over an extended window of time. What was successful one year may be the wrong approach for the next year. The sell-early-and-sell-often method versus the store-and-wait method often take turns flip-flopping as the best approach. Only hindsight provides true answers of “what you should have done.” Yet, knowing that prices could have significant movement up or down the next 12 months is at least a starting point to develop an approach to balance risk and reward.
More than ever, both end users and producers need to focus on a strategic approach, using the right tools at the right time for the right reason. As an example, a big fear of producers is selling at prices that are good at the time, only to be disappointed that prices went higher. If forward selling, consider buying calls to cover these sales. That may be the protection you need in case fertilizer prices and/or supply is limited, and corn futures respond by moving substantially higher. Or, buy out-of-the money calls and set sell targets. If your targets are hit, you are selling higher and have ownership. If afraid to sell, then consider purchasing puts to establish a price floor. End users can do the opposite. Buy your corn or beans now and purchase puts to manage downside price risk or buy calls to manage upside price exposure for future cash purchases.
Getting “deep into the weeds” of strategy is time-consuming and requires a thorough understanding of tools to manage various scenarios. Whether a buyer or seller, knowing what you can and can’t do to manage risk and opportunities is important. Work with someone who can guide you to make informed and mathematical decisions. The year ahead has all the makings of one that could see an extension of the high volatility of the past year. Embrace the volatility and manage it.
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.