Treading Water

What’s Happened…

Recent movement in grain and oilseed prices might be described as watching paint dry. Little price volatility is reflective of a stand–off in fundamental factors as well as other outside influences. Harvest pressure, uncertainty with a government shutdown, trade wars, and ample supplies are keeping a lid on prices. Corn futures, currently trading near $4.20 on December futures, have not moved outside this mark by more than 15 cents for several weeks. Soybeans have been trading in a range of nearly $1 for a year with the most recent trade activity in a 50–cent pattern. Wheat futures also have been on a gradual slide, moving in a range of near 20 cents in the last two months. Supporting prices are variable yield results, suggesting the most recent USDA yield estimates may be too high. Additionally, prices are historically low and, with rising input costs, corn, soybeans, and wheat are considered cheap and a great value to end users. 

Why this is Important…

Low prices tend to cure low prices. In a period of increasing supplies, prices tend to move lower, then sideways, and eventually higher. As demand builds, the need to continuously increase supplies sets the stage for a price recovery. Some recoveries are shallow, as was the case this past year. In other years, gains are sharp from supply disruptions, sending prices rapidly higher (mainly from reduced acres, weather concerns, or both limiting production). The key is to recognize that prices eventually break out of a range and establish a new pattern. There is an old saying, the longer the market moves sideways, the more violent the breakout. 

While sideways price action is not unusual, it can be excruciatingly stressful. Hope does become a strategy for producers, while end users tend to grow complacent. Preparation for the next move is paramount. End users are currently offered a great opportunity to lock in long-term supplies at or below the cost of production.  

At a minimum, they can employ paper strategies to shift long-term price appreciation risk. Now is the time to plan and execute. Producers who are struggling with low prices need to take time to prevent a poor situation from getting worse. Negotiating basis contracts, selling into the carrying charge, or moving excess inventory are a few steps of many that can reduce market risk exposure. Retaining ownership with fixed-risk tools is a great way to prepare and participate in a price rally. Buying calls on stored grain can be a bit risky, yet if prices do rally, these call options provide the discipline to sell cash at predetermined levels. The temptation in a price recovery is to “watch it.” That may not be good enough if prices rally only to quickly turn lower. The opportunity to sell can disappear quickly. Discipline to sell in an expected price range is critical. Preparation for a larger move is also critical. Owning call options does this.

What can you do about it?

Place your efforts into a planning and execution process for the grain you are producing this year and next year. Run the numbers and measure the data. Calculate the risk of strategies you are considering, including the decision to do nothing. Once executed, revisit weekly to determine if changes need to be made. Market your production looking forward, meaning, don’t worry about what could have been. Rather, concentrate on what can be. Prices may be treading water for now, however, history suggests change is coming.

Find out what works for you… 

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally–charged responses to market moves, which are always dynamic.  

About the Author: With the wisdom of over 35 years at Total Farm Marketing and a following across the Grain Belt, 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. 

Author

Bryan Doherty