TOP FARMER WEEKLY PERSPECTIVE 8/5/2022 BY BRYAN DOHERTY
Focus back to Demand
A hot and dry forecast for the last week of July; prices rallying $2.00 in soybeans and 70 cents in corn futures. Yet, at the first hint of a change in the weather, both markets dropped substantially. Export sales in recent weeks have all but dried up. Importers likely went to a just-in-time inventory model, anticipating cheaper and plentiful new crop supply available in just weeks. Their bet is that the U.S. will have a good crop and the need to chase higher priced old crop is not necessary. That could be a risk – and a big one if crop conditions are not near ideal from this point forward. Yet, the drop in price on a change in the weather forecast is indicative that the market is no longer focused on tight supply. Rather, the focus will be on a demand market that, either through necessity or comfort, has backed away. The necessity explanation is that prices are too high. Despite the need to purchase supply, cost is prohibitive. A bet for lower prices on good crop conditions keeps new buying at bay in early August.
The risk this year is a crop that is behind schedule by about one week, due to a cold and wet May. According to the USDA Crop Progress Report, nationally, the silk stage for corn for the week ending July 31 is at 80%. That compares to a five-year average of 85%, which includes 2019, the latest crop on record. Soybeans setting pods was at 44% versus a five-year average of 51%. A lack of moisture, too much heat, or both within the first three weeks of August could bring a swift rally to futures prices. Demand would likely erupt as end users, both domestically and worldwide, will secure inventory. The preceptive view would change from a just-in-time inventory to get-it-secured. The futures market response will come in the form of end users buying to hedge future needs, while the speculator buys to take advantage of a price rally. In either case, upward price pressure is likely.
If you are an end user who wants to guard against upward price potential, yet also believe the path for prices is probably lower, then you want to consider using a call option. A call option gives the buyer (owner) the right (not the obligation) to own futures. Another way to think about it is purchasing an insurance contract against higher future prices. If the focus does shift to strong demand – a response to tightening supply and a more urgent need for end users to secure inventory – the call option can help to offset the cost of actual purchases. Should prices go lower, you stand to lose the premium you paid for the call option. Accordingly, you will likely be able to buy cash products cheaper.
The key here is being prepared for the market to move rapidly, perhaps in either direction. The old saying “prior planning prevents poor performance” applies. Talk to a professional and learn what may work best for your operation. Now is the time to put the plan in action.
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.