TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty

12/20/19

MORE SALES…YET MAKE SURE YOU’RE COVERED

If the last six years have taught corn producers anything, it is that production is more reliable than ever, and prices can quickly move from an uptrend to a downtrend. Trying to make sales while prices are rapidly declining is like trying to catch a falling knife. As a consequence of rapidly declining prices, you may feel as though you don’t make enough early sales at good prices and are left with decisions to make at harvest with what to do with too many unpriced bushels. Since 2014, we have tracked the number of calendar days from the contract high to where and when the market bottomed. The time window to sell near the top of the market has been small.

Research indicates that in 2014, the high for December corn futures to the low occurred in 145 days, and the drop (or change in value) was $1.95-1/4. 2015 showed a very similar quick drop in 36 days with a price change of $0.96-3/4. In 2016, the move occurred in 75 days with $1.34-3/4 separating high from low. In 2017, a drop of $0.73 occurred in 45 days. 2018 was similar with 49 days between high to low with a move of $0.79-1/4. In 2019, this past year, it was 84 days from the high to the low and a move of $1.20-3/4. All highs and lows occurred after the first of January in the same year as the crop was harvested. The average number of days including the 145 days in 2014 was 72.3 with an average change in the price for December corn futures of 25%. In other words, in about 2.5 months the high to low range for the year was established. If you weren’t selling aggressively in the upper range, the pain of lower prices came quick.

The lesson learned is that you may want to be a more aggressive seller on price rallies. In each of the years listed, corn prices traded above $4.00 and, in all years, ended under $4.00. The logical conclusion is you should be selling corn above $4.00. Now let’s review 2012, a drought year, in which the market saw a change in price of 67% and a rally from the yearly low (in June) to the high (August) of $3.43 in a mere 56 days. All sales in the midst of the rally were too soon as dry weather pushed futures to an all-time record high. If you are wondering why you haven’t made more sales in recent years, 2012 could be why you are cautious. Rewarding a 50-cent rally that year left you well behind where the market rallied to.

So what can you do to manage price movement? On-the-one hand, recent history suggests you need to be an aggressive seller, especially in price areas where demand seems to shut off (above $4.25 December futures). Yet, how do you manage these sales if prices continue to move up? We suggest a balanced approach. As prices move upward you should be making sales, but you should also have these covered. Do so through the purchase of call options. In fact, buy call options when volatility is low (just after harvest). While it may take some courage to buy December call options for the upcoming year (paying for time value), these same call options act as a catalyst to be a disciplined marketer allowing you to set and leave target points at higher prices to sell expected crop regardless of the outlook for corn prices. When, and if, these trigger points are hit, you already have re-owned this bushels with limited risk. This strategy of setting sell targets and owning calls can help you achieve enough sales to make a more impactful difference to your bottom line, especially if the rally is short-lived.

If you have questions on cash marketing strategies or would like ideas for your operation, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.

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.