Preparing for multiple price scenarios

What happened

Last year, it was common practice for many corn producers to enter into a basis contract. They assumed that corn futures prices would rise and subsequently profited. Unfortunately, the opposite happened. Prices fell and for many, the local basis improved. The opportunity to sell at higher prices was limited.

After the downward trend in January and February, prices recovered a little until mid-May, after which they fell rapidly again. For many, this was a financial disaster and, perhaps just as importantly, a psychological burden. So what have we learned from this and what can be applied in the coming year?

Either way you look at it, the report was negative for prices, with the market losing nearly 40 cents in two sessions. Soy products were also weaker, with soy meal hitting new yearly lows and oil again testing its contract low. Good weather for crop growth and maturity in most of the Midwest is also putting pressure on prices.

Why this is important

In hindsight, everything is clear. It is easy to advise farmers to sell more in late fall and early winter, but sometimes it just doesn’t work.

Many had expected prices to recover after the harvest. A higher yield forecast in January, weaker global demand and good harvests in South America meant that end users only bought as needed. Speculators bet on lower prices. Inflation and higher interest rates likely played a role in buyers’ decisions, who had to consider the financial implications of a long-term dollar peg. Regardless of the reasons, farmers have learned over the past year that it is important to prepare for multiple price scenarios and implement a strategy accordingly.

For example, if one wanted to set a minimum price while leaving open the possibility of price increases, buying puts to protect lower prices whether the crop is in the field, in storage, or in a basis contract was one option. Storing crops has advantages, but can be costly without a plan to defend against a price decline. Although storing grain buys time for a price recovery, you are taking on market risk (falling prices), basis risk (and opportunity), and the cost of money. Last year, basis contracts were attractive at the time of implementation, and falling prices proved costly.

What you can do about it

Think of managing your crops as inventory. You hire yourself to manage that inventory. If someone hired you to manage their inventory, what would your boss want you to do?

It may seem a little odd to think about managing your crops this way, but ultimately all decisions are measurable and have consequences. Regardless of your approach, you should ask yourself: What happens to the value of my inventory when prices change? What if the price goes up a little or goes down a little? What if the price goes up a lot or goes down a lot?

Planning your strategy in advance takes time and discipline. Execution also takes time and discipline, but that’s what a portfolio manager does. Learn about the risk shifting tools available and use them to capitalize on opportunities. Have strategic conversations with your advisor to help you navigate the markets and use the right tool at the right time to achieve your goals.

Find out what works for you

Work with a professional to find the strategy(s) that best suit your business. Communication is important. Ask critical questions. Be fully aware of the consequences and potential benefits before implementing. The idea is to make good decisions for the business and react less emotionally to market movements, which are always dynamic.

About the author: With 30 years of experience at Total Farm Marketing and a following throughout the Grain Belt, Bryan Doherty cares about his clients, their success and long-term, productive relationships. As senior market consultant and vice president of broker solutions, Doherty lives and breathes farm marketing. He has a deep understanding of the tools and markets, listens and communicates with purpose and clarity to ensure clients are happy with decisions.

The data contained herein is believed to be from reliable sources but is not guaranteed. Persons acting upon this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involves a substantial risk of loss and may not be suitable for everyone. Therefore, you should carefully consider whether such trading is suitable for you given your financial situation. Examples of seasonal price movements or extreme market conditions do not mean that such movements or conditions are common or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you make to buy, sell or hold a futures or options position as a result of this research are solely your own and are in no way deemed to be endorsed or attributed by Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc. and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A client may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. Unless otherwise noted, services mentioned are services of Stewart-Peterson Group Inc. Presented for solicitation.