The extreme price moves the last two years have given me two textbook examples of how my three-step risk-management plan works. I learned a lot about margin calls and rolling up put options in 2012. In 2013, the hedges worked great, and the puts helped protect income.
In both years -- 2012 was the year of the a huge bull market in grain prices; 2013 was the year of the huge bear market when grain prices collapsed -- my three-step risk-management plan worked to protect my corn and soybean income.
When the corn market dropped under $4.20, the phone rang at least twice per week -- sometimes daily -- with a farmer who said, “I read on the Internet that corn futures would drop below $3.00 per bushel by the fall of 2014.” The professionals seemed to agree; a lot of the conventional supply/demand economists are getting really bearish. It's almost been like a contest to see who can project the lowest price.
I don't agree.
Be realistic in your price prospects for 2014.
Watch these charts to glean trends when it comes to buying hedges or puts.
A farmer asked two excellent questions at a marketing seminar last winter. I, along with another instructor, researched the answers. Now they have become part of one of the option classes in the Successful Farming(R) Marketing Academy.
The first question: “What works better: Hedging about 50% of my corn crop at the end of June or buying puts on 100% of the new-crop corn?”
The second question: “When is the best time to put on those hedges?”
U.S. farmers had another challenging crop-production season in 2013. This created a lot of volatility in the spring when planting delays threatened corn yields and in late summer when a drought took its toll on soybean yields. As combines are being put away, U.S. farmers ended up with a great corn crop and a fair soybean crop. The record 14 billion-bushel corn-crop projections proved to be too optimistic, and it appears it will be another year of disappointing soybean yields.
The long-term grain price cycles I work with and my analysis of grain fundamentals both suggest major lows in the fourth quarter of 2013 or the first quarter of 2014. Let me explain.
Farming has changed a lot in the 38 years that I’ve been writing about marketing grain. Before the Internet, you didn’t have GPS or autosteer on your farm equipment, but you’ve quickly adapted to new technology, and the pace of change is increasing. Changing technology has also altered the way you sell your grain. You now have a number of marketing alternatives that were not available 30 years ago.
There are a lot of factors that impact grain prices. The fundamental factors -- the supply and demand of grain -- have always been obvious and easy to understand. For example, when the weather turns hot and dry, supplies are threatened and prices move higher. (Just think of last summer and how the drought rallied prices!) Another example is when a USDA report shows a lot more acres than expected. All that extra anticipated supply triggers a drop in prices.
In general, prices will change when demand is much better -- or worse -- than expected.
Before I even started my presentation at a seminar last winter, a young farmer came up to the podium and quietly asked, “How much lower can it go? Will it ever come back?” He was very nervous that day. He was asking these questions just as the grain markets were collapsing.
We talked a little more, and it became clear he didn’t have his 2012 crop sold or any of his 2013 crop forward-sold. We had a few minutes before my presentation started, so I pulled out my long-term charts, and I showed him what I was thinking.