Planting Prep Is Necessary, Don’t Forget Marketing, Analyst Says
Spring is just around the corner, and most farmers are turning their attention to their top priorities: field preparation and planting.
These are, as they should be, your top priorities.
An additional priority that deserves your attention is keeping your eye on the markets.
Last year was a prime example of how prevalent this is. Prices were moving higher into the spring months, when many producers were extremely busy. By the end of May, some were surprised to see how quickly the markets were falling apart. During June, the markets continued to slide, making it a disaster to try and price product.
The speed at which the markets have gone down over the last several years has been somewhat eye-opening. Catching reasonable prices was nearly impossible.
Let’s recap what’s happened each year since 2014.
In 2014, December corn futures peaked on May 9 at $5.14¾, and by mid-September had dropped $1.95 in a continuous downtrend (a change of nearly 38%).
In 2015, prices peaked on July 7 at $4.54½ and dropped over 96¢ in a mere 30 days, finding a low in July.
In 2016, prices peaked on June 17 at $4.49 and quickly eroded over the next 76 days, dropping $1.34 and bottoming at $3.14¼ on August 31.
In 2017, December futures peaked on July 17 at $4.17¼, quickly eroded over 52 days, dropping 73¢ and finding a low at $3.44¼ on August 31.
Last year, prices peaked on May 24 at $4.29½, dropped just under 80¢ in 50 days, finding a low at 3.50¼ on July 12.
In most of these years, the prime marketing window was between late winter and the early part of summer. When prices are trending upward, in the middle of your busy-ness, you may take a quick glance at the markets.
You may conclude that all is well and there is no urgency to make a decision. You may even think that any sale is a mistake because prices are going higher. And even though you know the uptrend won’t last forever, you may tell yourself that doing nothing will pay dividends.
Then the end comes, prices head lower, and you can't sell fast enough. One week you feel great about taking no action, and the next week you feel horrible because you didn't take action.
To help alleviate this, take the time to develop an approach that can take advantage of rallies and keep you balanced.
Market enough grain that is significant in the face of falling prices, and use tools that allow you to benefit if prices rally again.
Options are a tool that can do this. Set target points to forward contract. At the time these sales are triggered, look at buying put options to shore up a price floor.
If prices continue to rally, unpriced inventory (production you have yet to produce) gains in value. Your forward contracts don't. More specifically, when you forward contract, look at buying out-of-the-money call options. If weather becomes a major factor affecting crop production, and prices rally, your call options gain value. That value helps to offset the value you lose in your forward contracts.
As with any strategy, there are risks and rewards you need to understand. Check with your advisor to see how this strategy may align with your goals.
If you have questions or comments, contact Top Farmer at 1-800-334-9779 Ext 129.
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.