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Mother Nature Is Still In Charge, Analyst Says
While at the Commodity Classic held in Anaheim, California this past February and early March, the author of this Perspective had plenty of opportunities to visit with producers.
We talked markets, farm policy, politics, and the world at large. One theme seemed to surface, the suggestion that crop production is nearly bulletproof and that weather plays little role.
While listening patiently, it became abundantly clear that memories are sometimes short-lived. Production challenges exist every year, and weather is still the dominant factor affecting supply and price direction.
Of course, new equipment, better tillage practices, genetics, and most importantly, better farmers are increasing the odds of generally good (if not great) crops in most years. Yet, when you think you have Mother Nature figured out, you're probably in for a rude awakening. Ask the Argentine farmer this year, who is struggling with dry weather and has been since early fall. The USDA figures on this month’s Supply and Demand report indicated a significant crop production change. Argentina’s soybean production in February was estimated at 54 million metric tons and is now at 47 million. Last year's production was 57.8 million. The Argentine corn crop was also downgraded from 39 million metric tons in February to 36 million tons. Last year's figure was 41 million metric tons. Not only does weather play the most critical and important role, it will also determine the fate of commodity prices worldwide. After successive years of large crops worldwide since 2012, the marketplace has become complacent and is used to cheap and abundant supply. While this helps the demand base grow for commodities, it is painful for producers because margins are squeezed.
Often after a short crop, as was the case in 2012 when droughts struck the U.S., prices rally and consequently demand diminishes. Production usually increases as high prices create a rush to produce more. Ultimately, once this rush has occurred, oversupply exists. As 2018 unfolds, the expected shortfall of production in Argentina sets the stage for world corn production to be less than world demand. This increases the need for the U.S. to produce another banner crop. Six in a row? Is this pushing the bounds of luck?
Corn producers should not necessarily turn bullish, at least not yet. They should be aware that prices are potentially on a springboard. Yet, we've been down that road before, and prices, which seem poised to rally, can quickly fall apart. This is particularly true if weather cooperates, as was evident in 2016 and 2017.
The key for you is a balanced approach. Sell into the highest probability price window for December corn futures, which is between $4.00 and $4.50. Cover these positions with call options. On the production you intend to not forward sell, purchase put options to establish a price floor. As summer unfolds, weather will determine price direction. Be ready. A balance of cash sales, re-ownership with calls, and a flooring mechanism with puts will prepare you. Anything can happen. When I hear absolutes, like I recently have, something big is likely to happen.
If you have questions or comments, contact Top Farmer at 1-800-TOPFARM, ext. 129. Ask for Bryan Doherty.
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Carol Tillmann Front Desk Administrative Assistant | Stewart-Peterson Office: 800.334.9779 | Fax: 262.334.6225 email@example.com
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