TOP FARMER WEEKLY PERSPECTIVE 12/31/2020 BY BRYAN DOHERTY
A New Year and New Opportunities
As we look back, 2020 was an extremely volatile year with the full spectrum of market movements. Many markets experienced an extreme blowout, as the full impact of COVID-19 began to be felt, as mass liquidation of commodities as well as equities occurred. By the late March / early April time window, the world was full of uncertainty and prices collapsed across the agricultural spectrum. Energy markets traded into negative price territory. Talk of sub $3.00 corn prices and expectations for beans to trade to $8 was surfacing. Yet, the markets rebounded and, in some cases, with a vengeance. Significant money invested by funds occurred as both commodities and equities were considered strong value. A sharp recovery in the equities was followed by sharp gains in commodities. Funds wasted little time aggressively reversing net short positions and moving into the long side of row crops. Fast forward to the latter part of December and soybean prices are now trading close to $13.00 and corn over $4.50. Energy prices have recovered to above $45 for crude oil.
As 2021 quickly approaches, farmers are faced with new decisions and the best opportunity in several years to sell old crop and begin pricing new. Tighter inventories due to weather reducing final yield and massive buying from China have depleted projected carryouts. Current estimates have corn carryout at 1.7 billion bushels and soybeans at 175 million bushels. The stocks-to-usage figure for soybeans at 3.9% is the second lowest in the last two decades. Markets are more sensitive to news and can quickly change direction. The new year is bringing new opportunity. Yet, volatility could be extreme. The key is for you to create a balance in your approach to marketing so you either do not sell too much too soon or not sell enough.
A method to create a balanced approach to your marketing is to utilize cash contracts as well as call and put options. Consider forward selling up to half or your projected crops or livestock through cash contracts. On the other half – purchase put options. You have now created a price floor on all your expected production. On the half that is forward sold, purchase call options to retain ownership. You have now created an environment that prepares you for whichever way the market moves. Have a conversation with your advisor regarding which options and how much time you need to keep your strategy in force. In addition, you will likely be needing to tweak your strategy as price movement unfolds. Discussing next steps will be an important process as well. By strategically preparing yourself, you better manage risk and opportunities rather than let the markets manage you.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, 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.