TOP FARMER WEEKLY PERSPECTIVE 12/18/2020 BY BRYAN DOHERTY
Too Early to Start Selling New Crop?
Hopefully, your first sales are your worst sales. This phrase is often used by grain producers when they begin making sales of their projected new crop. At some point, you must get started marketing your crop. Preferably it is at a price level that we would term a value sale. That is, if it is your worst sale, you can absolutely live with it. The mindset to get started marketing is the assumption you will produce a crop close to normal in size and that additional sales will occur at higher prices. Ultimately, you build a higher average from where you started.
As of the writing of this Perspective, December 2021 corn futures are trading near $4.10. In recent years, the market has not offered much better than this level other than in the spring of 2019 when prices peaked at $4.73 in June due to a very cold and wet spring, which led to a historically late planted crop. So why not get started this year? The challenge getting started is that current prices, while good, may not offer an attractive return on investment. More importantly, however, corn prices have been trending higher since August. The reason for optimism is growing world demand in a world of decreasing inventories. This is particularly true in the U.S., where, six months ago, projected carryout was over 3 billion bushels and now is 1.7 billion. The story in soybeans is even more compelling, with November 2021 futures trading near $10.50, an attractive price. Compared to old crop trading near $11.50, by many accounts, this is not high enough. Strong demand and depleted world inventories with U.S. projected carryout now at 175 million bushels also suggest that, like the corn market, bean prices may have room to move higher. Will patience pay by waiting for higher prices, or are markets peaking and soon to begin a grind lower as the South American crop inches toward maturity?
Since it is a very long time until you harvest your crops, concentrate on strategy. If you forward sold 10% of expected corn and soybeans at current levels, how much of a “mistake” would this be? What if you placed additional orders above the market to get more marketed? Recent history suggests that, when prices are done rallying, they drop quickly. Averaging sales higher up to a comfort zone of committed sales is a strategy you could begin to implement at current prices.
Everything is relative. If South America rebounds with big production and the U.S. follows up with big crops, it is likely that corn could be well beneath $4 at harvest and soybeans well under $10, maybe under $9. Options offer an intriguing alternative if you are concerned about committing to cash delivery. In particular, the fence strategy. When you purchase a put, you are buying the right to sell futures (not the obligation). Risk is fixed to the premium spent. You are establishing a price floor. Yet, in December of 2020, you are spending significant money to protect fall prices for next year, due to time value and potential market movement, otherwise known as volatility. To potentially lessen the cost of the put, consider selling a call option that is out of the money. You collect this premium. Ultimately, you are accepting one of two results: The premium collected for the sold call helps to offset the purchased put. Or, prices are higher by option expiration date, you lose the put premium you paid, and the call could be converted into a short futures at the strike price sold. If you can live with hedging at a higher price than where the market currently is when the fence strategy is implemented, then this may be a good fit. This strategy will likely require margin; risk of the short call is unlimited. Keep in mind, however, you have un-sold crop that should be increasing in value when futures prices move higher.
Before initiating any strategy, make sure and have a comprehensive and transparent conversation with your advisor first. As a producer of inventory, you also must take on the role of marketer and implement tools to manage opportunity and shift risk. Find the right tools for your risk tolerance that will help you achieve your goals. While there may be good reason to expect higher prices, these reasons exist in most any year. With dependable crops and great farmers, the odds are in likely also favorable for lower prices.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.
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.