Sometimes waiting can be costly
Haste makes waste comes to mind when people make decisions without a lot of information. Farmers are generally very diligent about gathering enough information to make good decisions. When researching something like buying a new corn planter, it takes a lot of time and effort to make sure that your decision is the right one.
However, when it comes to marketing, it may be a much different story. It's not unusual to hear farmers say "once I figure out what my crop looks like, then I worry about selling." If prices slide all summer into fall, by the time you have enough information about your crop to make a good marketing decision, opportunity is lost. When it comes to marketing, you may have to make some generalized assumptions about the upcoming crop, and make marketing decisions without full information.
The market is a living, breathing entity in which all participants come together on any given day anticipating a future price. Often in the winter and spring months, prices for row crops are higher than they will be at harvest, due to a higher level of uncertainty. As an example, in February you don't have very good information as to how many acres will be planted, yield, world supply and demand six months from now, and most importantly what your crop will look like. The market senses this and consequently a premium is generally priced into the market. As we look ahead for 2012, one can view the tight inventory in both the U.S. and world supplies as supportive factors and, at some point, that will change. Either supplies are going to get even tighter or they will grow. If you decide to wait for more information to make a decision, you will have pushed aside an opportunity to sell prices that already have a premium priced in them. Assuming trend yield for 2012 corn, it is highly likely that December corn futures will be much lower than the current $5.50.
Our suggestion is a balanced approach. Corn prices, while not offering significant profit, are still offering many producers very historically sound return on investments for 2012. As you look ahead, if you decide not to make sales, you are willing to take risk and bet that prices can only go one way, and that is higher. If they don't, you are in jeopardy of seeing negative returns by fall.
Therefore, sometimes it pays to make decisions in front of uncertainty. However, these are not decisions based on just wild guessing. Instead, they are decisions based on very specific strategic marketing. An approach you can consider is to forward contract and buy calls to cover these sales. Or, buy puts against un-priced expected production. You have just allowed yourself great leverage to shift risk and an opportunity to make future decisions with less emotion and greater information. You are now managing the market, not allowing the market to manage you.
If you have questions or comments, or would like help implementing strategy for the year ahead please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.