Why End Users Should Cover Corn Needs
Livestock and dairy producers are certainly aware of declining prices in their respective markets. Yet, demand for these products is solid, and it may be just a matter of time before prices can recover. At the same time, end users of corn should be keenly aware that world supplies are on the decline, and that cheap and readily available corn could already be behind the market. This may be particularly true if this year's U.S. crop doesn't measure up to results of previous years.
Record yields the last two years and expectations for another big crop this year suggest that buying feed as needed may be the way to go. It is easy to think there is no value in changing habits or risk-management procedures. However, with margins squeezed, you don’t want to risk higher feed costs. The likelihood of another record yield in corn is not very high. Corn yield in 2016 was over 174, followed by over 176 bushels an acre last year. Not every year is the same, and as the growing season unfolds, weather becomes the dominant factor. World demand for corn is in a steady uptrend, with 2017/2018 being the first time in eight years in which world demand is projected to exceed world production. Over 70% of the world's corn crop is produced in Northern Hemisphere countries. As weather goes this summer, so will corn prices.
If you are a livestock producer, it is more than likely that you are already challenged with weaker product prices for what you produce. The last thing you need is a surge in feed prices. While there doesn't seem to be any urgency to take action now, there are a number of variables that are beginning to align, which could suggest prices are poised to move higher. One is the potential for lower acreage, and another is a recent strong surge in export sales. Unknown weather means an unknown yield, and the need for high yield is paramount. A drop in yield may suggest the need to ration inventory through higher prices in order to preserve supply. While this may seem strange due to big crops in recent years, one has to recognize that world demand has caught up to (and is expected to surpass) world supply.
Consider a strategy to forward contract corn needs for the next three to nine months. Or, if you do not want to sign a contract and still establish a ceiling against higher prices, consider buying call options. Call options are wonderful tools to allow for prices to decline if crop conditions are good, and establish a ceiling against futures prices should the market rally. With this, you are well positioned to manage risk before it becomes a concern. There are other strategies that may work well for your operation. Any marketing professional will be happy to discuss them with you.
If you have questions or comments, 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.