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Seasonal price patterns still work
Corn prices have rallied higher later in the year in the last five years. Shift your new-crop selling from March-June over to April-July. March, which used to be a good selling month, is now usually a time to buy. The seasonal low has been coming in either September or November.
“I'm not going to sell ahead ever again” was the comment from a frustrated young farmer in western Illinois at a fall marketing seminar. “It has not worked the last two years, and now I have really dug myself in a hole.”
In the 30-plus years that I've been holding marketing seminars, I have learned to ask a lot of questions before I give a response. Here are the first basic questions I ask.
• Do you have crop insurance? If so, at what level?
• What percentage of your crop did you sell ahead?
• How did you sell it ahead?
• At what price are you sold ahead?
When I quizzed the young farmer, I found out he had 85% RP crop insurance on his corn and soybeans; he had only forward-sold about 30% of his crop ahead (although now with the drought, it was more like 50%); he had sold ahead on hedge-to-arrive contracts; and he had sold half of his crop ahead early and had an average price on December 2012 corn at $5.80 and his hedge price was at $13.40 for the November 2012 soybean futures.
With the crop insurance policy the young farmer had, the yield he was going to harvest, and the amount he had sold ahead, I told him he was still going to have an OK year.
In the 30-plus years I've been holding marketing seminars, I have learned to ask a lot of questions before I give a response.
His biggest mistake wasn't selling ahead – it was selling ahead too much all at one time. Overall, he did a good job. The new-crop sales would have been to his benefit the majority of the last 10 years.
As a seasonal seller, I believe that seasonal selling over the long term helps my bottom line.
This year, like most years, I made incremental new-crop hedge recommendations in the April-July seasonal time period. This year (like one out of eight years), the new-crop forward-selling price was less than if I had just sold right off the combine. The reason I sell ahead each year is that I am never sure when we're in one of those eight years. What I gain in the other seven years more than offsets my losses in a year like this.
The market has changed a lot over the last 30 years, and the seasonal patterns have changed in the last five years. As a result, the way that I make recommendations to sell cash crops and to place new-crop hedges has changed as well.
Soybeans now trade in two six-month cycles rather than a one-year seasonal pattern. In years when there are production problems in South America, you can get a January or a February high. In years when the problem is in the U.S., prices will peak out in the late summer months.
Changes for corn sales
I've noticed four changes in the last few years for corn. Here's how it impacts my corn sale recommendations.
1. Corn trades more like energy many days than as a feed grain. If crude oil is trending higher, then corn will usually follow along.
2. Corn is a favorite to trade by investment and index funds. This has created a lot more volatility and a lot more volume.
3. China is an active buyer on every break. Five years ago, China was still exporting in competition with the U.S.
4. The seasonal high has come later in the year. I used to sell ahead in March- June. Now, I've shifted to April-July.
Changes For Bean Sales
I've also noticed four changes in the last few years for soybeans. Here's how it impacts my bean sale recommendations.
1. Soybeans follow the U.S. and global stock markets. If I look at the soybean market at night and the stock market in China is higher, soybean prices are just about always higher.
2. Funds are major participants in trading soybeans. This creates more short-term volatility and a lot of unexpected price moves at the end of each month and at the end of each quarter.
3. Most years, Brazil and Argentina's combined soybean production is larger than what the U.S. produces. That means there are two major weather markets to trade each year.
4. I now look at soybean price cycles as two six-month patterns, rather than a one-year pattern.
So how do you use this information to make better decisions in this new market environment? Here are my three recommendations.
1. Continue to be a seasonal seller. If you sold ahead in 2012 and were frustrated with the results, you will be more frustrated if you do not sell ahead in 2013 and the usual fall harvest lows occur.
2. Make a series of 5% or 10% new-crop sales. With the increased volatility in all of the grain markets, making eight, 10, or even 12 new-crop sales will likely help you get a better average selling price.
3. Use crop insurance as part of your total risk-management plan. When I showed that young farmer from western Illinois the amount of the indemnity check he would receive with new-crop corn and soybean futures at their current high-price levels, his eyes lit up. Those insurance payments will not create a big profit for his farm, but they will keep him in farming in 2013. Next year, odds are good that he will get better crop yields, more bushels to sell, and a normal seasonal low.