TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty

1/3/2020

SELL EARLY AND SELL OFTEN

This past year offered what appeared to be an historic opportunity for both the corn and soybean markets to make a major price advance, as extremely late planting conditions and less-than-ideal weather through mid-June set the stage for a smaller crop. By mid-summer, good weather, ethanol waivers for small oil refineries, and a lack of progress on a trade deal had prices quickly pushing into new lows. While yield and production were down, there wasn’t a major shortfall to this year’s crop production.

Was there a lesson learned? If so, it may have been that you need to make some sales, regardless of the potential for smaller crops or higher prices. One approach to avoid missing selling opportunities is to sell early and often on a percentage of your expected production. Another is to sell on price value. As prices rise, regardless of outlook, make sales.

Selling early and often refers to taking advantage of both weather premium and the cost of carry (storage), which is reflected by higher prices on deferred futures contracts. If assuming normal production, then it would make sense to sell “value,” as you expect weather and storage costs to dissipate over time. Make sales in increments of 5 to 10% of expected production. The goal is to get started selling and, as the market moves, sell more.

If selling on value (usually occurs when prices move higher), you will initiate sales if prices reach a level of your choosing. You sell regardless of the “news” that might suggest a strong rally. Value sales have proven to be a productive method to marketing grain since 2012. In 2012, a drought occurred and prices rallied to all-time highs. The years after 2012 reflected declining demand and increasing supply, both domestically and throughout the world. Because supplies increased and demand diminished, sustained price recoveries have not occurred. Nonetheless, there have been opportunities to sell December corn each year above $4.00, with the lowest high being $4.17 in June 2017. Bean sales have been doable above $9.50 on November futures.

Over the last 30 years, the dependability of producing crops has continuously increased. Even in 2012 when a nationwide drought stuck U.S. farmers, final yield was only 25% lower than the very first USDA estimate in May of that year. While it is important to plan for another year like 2012, it is also important to plan for big crops, which occur most years. Until proven otherwise, the marketplace likely expects normal or above normal yields. Production increases are due to better equipment, technology, genetics, and great farmers. Taking advantage of price premiums when they exist becomes paramount. In recent years, managed money (large speculative accounts) in futures have continuously established large short (sell) positions. It is likely that the investment community will continue to bet on big crops.

The time window for selling early and often is 18 to 6 months in advance of harvest. The obvious questions is: what happens if prices do rally? What if I sell too soon? What happens if a year like 2012 does occur and prices increase by 50% or more? You need to be careful on the percentages you are willing to sell. For many, selling more than 50% of expected production becomes uncomfortable. A component of selling early is also planning for a drought or events that could push prices upward, perhaps dramatically higher.

How do you cover positions in case of crop-reducing weather? Purchasing call options against early sales is a step toward a balanced marketing approach. A balanced approach accounts for all potential market moves. We suggest buying December corn or November soybean calls. These cover your sold bushels through the harvest season. Or, you can purchase short-dated options. Short dated options are for a shorter window of time to cover deferred contracts. The downside is they have a limited amount of time to work in your favor. The upside is you are only paying for a time period you desire the coverage, i.e. reports, weather, etc. As an example, a March short-dated corn call has an expiration date in February, yet is tied to the December futures contract. You may want to purchase this call if you are only concerned about the time window between now and the end of February.

It is anyone’s guess what crop production will look like in 2020. However, know that you have tools to manage volatility. By creating a balanced marketing approach through the use of multiple marketing tools, you can help reduce your risk and take advantage of opportunities. Planning and forward thinking will likely prove beneficial, as will selling early in the marketing year when prices hold premium and when prices hit levels you desire.

As with any strategy, make sure you understand the risks and rewards. 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.