Think April, May, and June, Analyst Says
Trying to predict prices is difficult and not an exact science.
There is a school of thought that long-term fundamentals (supply and demand) determine price direction. In times of uncertainty in the crop size, futures prices often move up, reflecting the willingness of end users and speculators to buy.
For corn and beans, typically that uncertainty begins in late winter/early spring. This is the time when about six months of usage is behind the crop since harvest, and virtually all of the unknowns with producing the crop in the coming year loom large.
Basic economics suggest that, when demand is constant and supply expectations are on the rise, prices will move lower. In contrast, as supplies begin to dwindle, prices move higher.
From a yearly perspective, prices are lowest at harvest, as there are few unknowns about the crop size.
Then there’s the window of uncertainty when prices move higher, which typically peaks in April, May, and June. Prices will then move lower as uncertainty begins to fade. This window of uncertainty often provides producers with an opportunity to forward contract a portion of their expected crop and sell stored grain.
Yet, human nature is often counterintuitive and can get in the way of making good marketing decisions. As prices move higher, prior sales appear to be a mistake. Despite the fact that prices are now better, sales usually slow or stop. This is where discipline and strategy need to take over and push emotion aside.
What can provide discipline in your market decisions? Consider purchasing call options at a low price when volatility and uncertainty are low. This would be the late fall/early winter time frame.
The calls provide reownership, so that when prices do eventually move higher, there is no reason to hold off on making sales.
Set target prices and let the market trigger the sales. The inability to sell aggressively on price rallies has been the Achilles heel for many farmers, particularly the last three years when prices tipped over and rapidly fell apart.
Often, when prices do start moving lower, the drop can occur so fast that the selling opportunities are missed. It can appear as though you should have sold nothing one day, and everything the next day. This can become very emotional.
The time period from high to low prices can be short-lived. As an example, December 2018 corn futures peaked at $4.29½ on May 29 and hit a summer low on July 12 at $3.50¼, a drop of 79.25¢ in about six weeks (loss in value of 18.5%).
We believe a balanced approach to marketing is best. Consider purchasing call options during the fall months. With the calls in place for reownership, you have confidence to forward sell when prices move higher.
In addition, you purchase put options to protect the price of grain you intend to sell after harvest. This should keep you well-balanced, in that you have protected yourself against a price decline on all of your expected production and can still take advantage of price increases.
If prices move higher, the call options you purchased will retain ownership for bushels that are forward sold. Your unpriced grain (with puts purchased) has now appreciated in value. If prices decline, your put options have increased in value. In this strategy, you are long 100% of expected production.
Because you wear many hats, finding time to market can be a problem. This may be especially true during spring when you are furiously doing what needs to be done: planting and tending to crops.
With calls and puts in place and target prices set, let your strategy unfold and, in essence, take care of itself. With tight margins, it is more and more challenging to make ends meet if short-lived opportunities are missed.
The old saying, “Prior planning prevents poor performance,” does apply when it comes to marketing. Make sure you are set for the year ahead. If prices recover and offer opportunities into the April, May, and June window, take advantage of them!
If you have questions or comments, contact Top Farmer 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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