TFM Perspective 7-23-2021

TOP FARMER WEEKLY PERSPECTIVE 07/23/2021 BY BRYAN DOHERTY

End Users: Bird in Hand

The saying “a bird in the hand is worth two in the bush” this year could have valuable meaning to end users who typically purchase in fall when prices are expected to be lower. This year, volatility remains high as late July approaches and much uncertainty with the crop lies ahead. Critical ear and pod filling weather may have an extreme impact on price movement over the next 45 days. Those who purchase feed may look out their back window and, depending on where you are in the U.S., feel comfortable waiting to make purchases, while others may feel a growing anxiety, wondering if there will be any crop available.

As a buyer, you are typically betting that prices will move lower in the fall, as crops are usually good, which means price pressure. This year is different, to say the least. Parts of the Midwest will have what appears to be record production, while other parts remain on the bubble as to whether there may be any yield. Regardless, the macro picture over the last 12 months has seen a dramatic decline in supplies due to a variety of reasons, both here in the U.S. and throughout the world. Leftover supplies (carryout) at the end of the marketing year have become critically tight. Anything less than trendline yields would likely suggest that a price drop into fall is not very likely. Adverse crop weather in the weeks ahead could have prices skyrocketing.

This is where the “bird in the hand” theory comes into play. End users of corn and soybeans should consider contracting their needs now. With the most critical weather for crop production upon us and the western regions of the Midwest and Northern Plains struggling as temperatures are expected to remain above normal and precipitation below, it is feasible to expect that national yield could be on the decline, further tightening an already snug supply. By having a contract, you have put yourself in front of all who will be buying as needed. The dilemma you potentially face is that prices could decline, especially if weather were to take a turn for the better. Consider buying put options against the inventory you have booked. Puts will be in place to defend the value of your contracted inventory. If you think about it, by locking in feed needs, you have shifted the risk of rising prices. If you purchase puts, you have added the benefit of potentially reducing your net price when you take delivery in a declining price environment.  You are prepared for the market to move in either direction. That is good planning.

Before you enter any position, be sure to visit with your advisor to understand the risks and rewards.

If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, 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.

Author

Bryan Doherty

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