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Farmers, Be Ready to Be Corn Sellers, Analyst Says
The past five years of corn prices have offered some opportunities to sell at profitable levels, though they have been few and far between.
Most discouraging for producers is when prices begin to rally on weather concerns, then quickly fade as the weather improves. The opportunity is gone within a week or two and, consequently, nine months out of the year you spend waiting for prices to recover. This year may be similar. Arguably, the macro picture has a firming undertone (or reason for prices to rally). The key in the year ahead will be a balanced approach to your marketing.
We believe a good balanced approach strategy is to forward sell enough new crop (an amount you are comfortable with), buying call options on those forward sales, and buying puts to cover the unpriced bushels. Perhaps the biggest concern we’ve heard from producers over the last five years is they hold too much inventory in storage, waiting for price recoveries. With regret, they do not sell enough earlier in the season.
Why is it so difficult to sell early? First, rallies have generally been supported by some type of weather event that could develop into a full-blown weather event (as it has in some years). Because of the chance prices will continue to rally, it is common to be cautious with sales. The flip side to this argument is that, in the last 15 years, technology, seed genetics, and farmers continue to improve upon what they do – produce crops. As prices go higher because of uncertain weather, aggressive sellers are rewarded. As the market realizes how much grain is expected, prices fall. This is the “normal” trend. End users are usually rewarded by waiting to buy.
It is very likely that we’ll see this scenario again this year. Farmers will be faced will the dilemma of making early sales or waiting. This is where discipline can be the game-changer. Make early sales with call options in place. That way, if prices continue higher after sales are made, you are protected with in-the-money call options. With a recent pullback in prices, now could be the best time to buy your call options. This may be akin to putting the cart in front of the horse. Often, the horse eventually leads. If prices rally, you could be in a great position to make more sales, even if they are at marginal profits. You can also consider purchasing put options on price rallies. Put options establish a flooring mechanism, and may raise your average price per bushel when (and if) prices drop.
We recognize that cash flow is tight, and you will be very busy in the weeks and months ahead. Taking time now to meet with your lender in establishing a hedge line of credit will give you the resources to implement the right tools at the right time. Invest your time and energy in preparing for the year ahead. It is probably the same amount of time you could spend cleaning your shop, mowing a ditch, or doing some other type of work, and it will have a greater impact on your bottom line.
If you have questions or comments, contact Top Farmer at 1-800-334-9779, ext 129.
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