TFM Perspective 5-22-20

TOP FARMER WEEKLY PERSPECTIVE 5/22/20 BY BRYAN DOHERTY

Why Wait?

If you are a feed buyer, you need to ask yourself why you might want to wait to secure feed needs. Obviously, there doesn’t appear to be any reason to rush, as planting is off to a good start and ample supplies are left over from last year. There is sense in that logic and conclusion, which suggests buying ahead so far has not been necessary. Yet, that can only make sense for so long. Here is why you should be acting to secure inventory sooner than later.

Futures for feed grains are near contract lows and substantially discounted, due to a collapse in energy prices and effects of COVID-19. It is mid-May and, while there is a higher level of confidence than ever that a crop will be produced, there are no guarantees. Most farmers will tell you that in recent years they have felt blessed, lucky, or both to have timely weather to help produce record crops. After last year’s smaller crop, the need for a big crop is paramount this year. There are still plenty of questions on the quality of stored grain as well as just how aggressive farmers will be to let it go at low prices. If a weather market were to begin to develop, farmers are likely to be tight-fisted holding last year’s crop, and end users will more aggressively trying and buy. Managed money is at a record short position for the year at near 200,000 contracts. Last year in mid-May, managed money was short a record number of contracts, and began to move out of those positions. Planting delays became real. It didn’t take long for the corn mark to rally well more than a dollar. This year’s weather pattern does not mirror last year, however. With so much growing season ahead, no one can accurately predict how weather could impact prices the rest of the season. We believe you should consider owning grain/feed before a weather market.

Another reason to own is that it is of good value. COVID-19 and low energy prices have been responsible for significant sell-offs in the commodity markets. Money looks for value and, if at any point in the growing season corn futures were considered undervalued, traders would quickly jump into the market regardless of your or my bias. China is said to need inventory of corn and beans to meet a growing hog herd, as well as fulfill commitments made to the U.S. through a trade agreement. Rumors continue to circulate that China also needs to replenish state-owned stocks. We continue to question the stockpile of corn that China supposedly has, and the quality of this corn. We are believing that corn is of value to China, and they could be a buyer. More than two-thirds of the world’s corn production is produced in the Northern Hemisphere. If weather is adverse anywhere in the Northern Hemisphere, prices could quickly jump.

What happens if prices go lower? What may be keeping you from locking in feed needs is fear.  The fear of paying too much for a commodity that could become cheaper. While it is true that prices can and may move lower, view that as a time to buy more. If you had the opportunity to buy a new truck 30% below the cost of production, how long would you wait to act?

The risk of waiting is substantial. If you don’t want to lock in your needs through a cash contract, then consider buying call options or futures in case of summer weather. Bottom line, as a livestock producer or end user of corn and feed, you are also in the risk management business. Shifting risk is part of what you do. At current prices, enough may be changing (higher energy prices, the expectation for exports to pick up, and a potential weather market), that doing nothing could be detrimental to your bottom line.  Most grain producers usually feel that, in the end, they never sell enough when prices are high. As a feed buyer, good crops in recent years and ample supplies may cause you to believe that acting now could be a mistake. After all, prices “have to” go lower by fall. Or do they? The problem with waiting is that you won’t know until it is too late. Take advantage of the value proposition being offered.

If you have questions or comments, 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.

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Bryan Doherty

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