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Bryan Doherty: Improving prices for grain producers

In recent weeks, prices for wheat, corn and beans moved higher despite continued high crop ratings for both corn and beans. In addition, the USDA report last week indicated that yield for soybeans is estimated at last year’s record high of 44, and for corn a record high of 165 bushels per acre. With increased acreage for both, that means record production. Nonetheless, prices have moved higher regardless of the USDA report as well as generally good growing conditions.

So what’s behind the rally? Obviously there could be any number of reasons a market can rally, not just crop conditions. However, despite good crop conditions, the global picture continues to indicate that world inventory is going to be somewhat tight in the years ahead. It will continue to take good crops at the current demand pace to meet consumer needs. The world has been faced with tight supplies before, yet generally this scenario develops on the heels of a poor crop(s). 

With both record corn and bean production expected, one wonders how high prices can rally in the near term. What would happen if there was a legitimate weather scare in either corn or bean production? Obviously there would be strong rationing. We believe much of the recent grain rally has come on the heels of a shortfall in wheat production. However, when viewing the overall picture of wheat, we are not convinced that world supplies are going to be changed dramatically, despite drawdowns in European and Russian production.

As for corn and beans, the world seems to be getting smaller. Therefore, the need for more products is being pressed each year. Technology and genetic enhancements, along with good farmers, will help to supply the world with these two commodities. As the world grows, it is apparent that the use of these products is also keeping pace with production. If you sum it all up, it means volatility. 

We encourage farmers to embrace volatility. When prices are on the low side, end users should be buying call options or purchasing inventory. As prices move into the upper-echelon of trading ranges, producers should be looking longer term at locking in value as well as utilizing forward contracts, hedge-to-arrives, and put options for price protection. Work toward maintaining a balance so that, whichever way the market goes, you are either majority long or short. This could be key to keeping farmers in business for years ahead. 

If you have comments, questions or suggestions, contact Bryan Doherty at 1-800-Top-Farm, 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.

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