TFM Perspective 2-28-20

TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty

Marketing Can Make a Difference

Last week’s USDA Outlook Forum suggests farmers will plant 94 million acres of corn with an expected yield of 178.5 bushels an acre. They also expect the average U.S. corn price for the 2020/2021 at $3.60. This suggests a loss of $29.00 per acre. We calculate that, to break even, the average price would need to be 16 cents greater than $3.60. While not seeming dramatic, 16 cents proves just how important marketing is and how the right decisions at the right time can make all the difference. In recent years, rallies have come quick and usually disappear even quicker.

What the baseline projections remind us is that in most years, corn production is a margin business, where prices will often spend much time trading near the cost of production. This isn’t new to farmers. Yet, at times during a season, the market has a history of offering opportunities to sell at levels that provide a return. There may be two learnings from this. One is that, since prices don’t trade much outside the range of breakeven, when prices are higher it may be important to be an aggressive seller. Emotionally, this is difficult for many, when prices only offer small profits. This is especially so as the market is moving higher for a reason. It becomes easier to do nothing, or even cancel existing sell orders. Yet, selling into rallies in most years has proven beneficial.

The second learning is that, while prices do usually trade near the cost of production, they will trade well below breakeven in strong production years, which is most years. Therefore, in today’s age of increasing world production (particularly from Argentina, Brazil, and Ukraine), and knowing just how quickly prices can fall apart, having sell orders placed at higher prices is critical. If these orders are triggered, buy puts at the same time on likewise bushels. Most farmers do a great job of selling some corn at higher prices, and not enough. Consider selling 1/3 ahead of harvest and buy puts on 1/3. Go stronger on each if you prefer to be more aggressive.

What if prices take off? Purchase calls against intended forward sales or hedges. Purchased calls will re-own the crop that is forward sold and help capture upside potential that sales cannot. Calls bought prior to making sales help provide the discipline to keep orders in place. The fear of selling too soon is managed. 2012 comes to mind when futures rallied more than $3.00 in less than 60 days, due to dry weather during the growing season. Preplanning is key. In times of tight cash and only moderate selling opportunities, a well-rehearsed and discipline strategy can make the difference between profits or losses for the operation, and keep you well positioned and balanced for much larger price moves.

If you have questions, comments or would like an idea for your farm, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.

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.


Carol Tillmann

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