Feed Buyers Urged to Secure Supplies, Analyst Says
The recent pullback in corn prices and other feed products is an opportunity to secure long-term needs at (what we will term) value. Value reflects the cost of a product that is available to buyers at, generally speaking, less than the cost of production. With an oversupply of corn and wheat, and expectations for world record supplies of soybeans, prices have been suppressed for some time. History suggests that, during this time of year, low prices should be taken advantage of for those who use these products.
How much should you buy? We recommend you purchase all of your expected needs through the end of 2017. We believe there is limited downside for prices this spring and, if prices were to move lower, we will recommend you secure first- and even second-quarter needs for 2018. We have seen four years of good crops and low prices. Consequently, the marketplace is used to seeing significant inventories. Do not be lulled into a trap of thinking this will always be the case. Prices can change direction in a hurry. Don’t get caught trying to chase rising prices; buy low!
The most important variable to crop production is weather. The impact of weather on prices is tenfold, relative to exports or other variables such as politics, wars, or trade agreements. Weather will become the all-important factor. Once supplies become tight, or even perceived as shrinking, the market will waste little time to factor in these variables and move prices. One only has to look back to 2012 when corn prices rallied well over $3.00 in less than 60 days. Once weather begins to grab hold of the market sentiment, those who own inventory will not want to sell, and everyone will want to buy.
If you do not want to book longer-term feed needs at this time, consider buying call options. Call options provide you the right to own, and not the obligation. With volatility low and the recent setback of prices, options may be viewed as an excellent way to help manage the risk of buying future feed inputs at a value. In a nutshell, options can work as an insurance policy against higher futures prices. Make sure you have a conversation with your adviser concerning which options to buy and how to manage these options should prices rally.
If you have questions, comments, or would like a feed-buying strategy for your operation, contact Top Farmer at 1-800-TOPFARM, ext. 129. Ask for Bryan Doherty.
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.