TOP FARMER WEEKLY PERSPECTIVE 7/31/20 BY BRYAN DOHERTY
Make Sales and Re-own on Paper
The growing season continues to rapidly advance toward what might be record-yielding corn and soybean crops. That is the good news. The not-so-good news is that this year, many producers have found themselves with less sales than normal. There may be many reasons, the most likely being futures prices (and cash) never reaching high enough levels to make selling decisions easy. After a smaller crop last year and much debate that USDA’s January Supply and Demand Report would finally indicate reduced yields, farmers tended to hold off on selling, waiting for a better opportunity. It never really came. The January report raised corn yield. A trade agreement with China didn’t spark a price recovery, as the wording by China to buy as needed at the right price didn’t install traders’ confidence to buy. Consequently, both old and new crop sales were lacking for most into February when COVID-19 started to rear its ugly head. Prices then saw significant pressure when an energy trade war between Russia and Saudi Arabia developed. It was pretty much lights out for corn and soybean prices, as they were working downward to harvest-type low values before spring got underway. A fast start to the planting season kept prices from making much of a rebound.
So, what to do now at the end of July when prices are still near harvest lows and not enough sales are in place? If you don’t have enough room to store, you need to act. Even if you do have enough room to store, you need to ask yourself if you want to fill your bins full, and then hope. Storing doesn’t fix your risk. Storing does provide opportunity to be paid for carry in the market and potentially lock a better basis. Nonetheless, it is still a risk. Consider selling cash on a forward sale sooner than later, hedge with futures, or use a hedge-to-arrive contract. The bet is that prices will be lower by fall, as you will be delivering these bushels you do not intend to store. Next, look to retain ownership. If you want a direct one-to-one relationship with the futures market, then you need to purchase futures contracts. This would be done if you forward sold. Most will argue that, when there is a carry in the market, you purchase the front month and if need be, roll to the next month when the front month becomes due. Others will argue to buy enough time, which could mean you are buying carry in the market. However, the theory in this strategy is that a rising tide will lift all boats, or a rising market price will lift all futures contracts. Therefore, the need to buy the front month and roll is negated. You will save money on rolling costs by buying deferred contracts.
If you want a quantified risk, then consider purchasing call options. A call provides you the right (not the obligation) to own futures, and the risk is set to the premium paid. A more conservative strategy is a bull call spread, where you will purchase a low strike price call and simultaneously sell a high strike price call. You are reducing your cost by collecting premium on the short call to finance the long call. You are also reducing your potential, as this is a fixed-profit position. Know the details, both pro and con, before entering this strategy.
There are no easy answers in difficult times. There are difficult questions and this Perspective is trying to answer some of those questions, or at least provide a starting point for a path to sell your corn or soybeans, in addition to providing direction if you want to retain ownership.
If you have comments, questions or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.
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.