TOP FARMER WEEKLY PERSPECTIVE 6/5/20 BY BRYAN DOHERTY
Putting the Cart in Front of the Horse
Grain producers know only too well how discouraging it can be when prices don’t offer much profitability, if any. This year has been a disappointment, as prices have factored in two Black Swan events: COVID-19 and an energy price war between Saudi Arabia and Russia. After shorter crops last year due to less-than-ideal weather and trade deals signed, there was hope that prices might move higher into the spring months and, consequently, offer better selling opportunities. Just the opposite has occurred, as prices plunged on adverse news that had little to do with crop production, sending futures sharply lower. Yet, there is a tendency for low prices to cure low prices and for market movement throughout the year, both down and up. History suggests there will be better prices to market your grain. If prices recover into the summer due to a weather concern, are you ready to aggressively make sales?
Good production capability based on reliable seed, improved genetics, and tillage practices, along with farmers incorporating new technology, have upped the odds of good crops. This has been evident the last six years, as crops somehow escape adverse weather and produce better than expected. It might be necessary to adapt the mindset that, unless weather (a drought) dictates otherwise, odds favor high yields and big crops. Over the last six years, December corn futures have rallied during the crop year, with the lowest high at $4.17. The highest high was last year at $4.73. Over those six years, however, when the market made a turn from bullish to bearish, there was an average of only 72 days between the market peak and a new low established for the year. The average drop from high to low was $1.16.
Consider buying call options now, when volatility is low. Prices for both corn and soybeans have been range-bound for the last six weeks. Buying calls now may be akin to putting the cart in front of the horse. Some would suggest you need to sell cash first, then buy the calls. Yet, if you purchase calls now and prices do rally, you can sell cash aggressively with confidence, knowing that you have your position covered. If you wait for a rally to sell and then buy calls, you will likely find that the calls are expensive. By then, increased volatility and higher prices are factored into option premium. The key is selling enough grain into a rally to make a difference on your bottom line if prices make a quick turnaround and head lower. Confidence to sell is heightened when call options are in place. If you make a mistake selling too soon and prices rocket higher, your call options retain ownership. You may likely have confidence to forward sell more. Use the right tool for the right time. Buy calls when prices and volatility are low. We’re seeing that this year in front of the growing season.
If you have questions or comments, 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.