TOP FARMER WEEKLY PERSPECTIVE 3/11/2022 BY BRYAN DOHERTY
Don’t Let this Opportunity Slip By
Let’s be clear. Marketing is not easy and there is no magical formula. It takes hard work, discipline, time, execution, and evaluation. It also takes knowledge in how marketing tools work and, perhaps most importantly, reaching out to professionals who can guide you in the decision-making process. Yet, with hindsight, the best strategy since harvest (and perhaps the easiest) has been to do nothing. Doing nothing is an extreme with extreme consequences. Few can sit on stored grain indefinitely. Often, fundamentals (supply and demand factors) can be most agreeable with higher price expectations, yet prices often top when fundamentals are friendly. In 2012, corn and soybean prices peaked after a favorable August USDA Supply and Demand report.
No one can foretell the fate of grain due to the war in Ukraine. It’s unknown if stored grain can be moved, a new crop can be planted, and Brazilian weather will make for a bountiful second crop or a disappointment. Additionally, fertilizer prices are sky-high and availability questionable for many U.S. producers. What will acreage look like on March 31 when the first farmer survey estimates are released? There is a lot of information (perhaps historic) that is in front of the markets this year. Prices could skyrocket. At some point, end users and speculators may not want to chase the market. Risk could become too much to bear with the perception of higher prices versus the risk of new purchases. This takes us back to the idea that marketing is not easy.
However, prices for 2022 production are historically high. Selling ahead on the first 25 to 35% of expected production on value sales makes sense. Value sales are those you consider highly likely to be profitable. In the end, these sales (if you did nothing else) can act like a pully if prices drop, bringing your average higher. If prices rally, they will act like an anchor, yet there will be more to sell at higher prices, so your operation’s expected net worth is on the rise. Consider put options to establish a price floor. Yes, they are more costly when prices are volatile. Still, they have a key function to serve. Purchase call options to cover forward sales or expected future forward sales. If anyone did this in the wheat market, hindsight will tell you that forward sales were done too soon, even though prices were very good. The calls, as of late, have likely ballooned in value, as wheat reached historical values.
The bottom line is this: Don’t let the unexpected make this a bad marketing year. Rising inputs are challenging enough, let alone the vision of what your balance sheet would look like if prices dropped significantly. What if there is a black swan event? If the last two years have taught us anything, it is to be prepared for anything. Before you head to the field, take time to strategize. Visit with a professional who can help in your decision-making. When it’s time to head into the fields, you can do with confidence.
If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
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.