Many farmers tell me they do well at picking prices. Maybe some do, but many do not. If farmers were good at predicting prices, most would have sold their 2016 crop for over $4.25 and would have their 2017 crop already sold for $4. Unfortunately, most farmers didn?t get $4.25 for their 2016 corn and few have much 2017 sold. Sadly, many farmers are fooled into thinking they are good at picking prices, when in actuality they probably have been lucky.
Some farmers have the misconception that I try to predict prices and sell at the high. Unfortunately, I don?t know when the market will be at its highest. And here?s the thing: no one else knows either.
Since I don?t know where the market will go, I need to be prepared to sell all the time. That way I can take advantage of opportunities when they become available. The key is knowing your breakeven points and selling when the market hits adequate profit levels, because that may end up being the top of the market. Every time I sell, I actually hope it?s the worst sale of the year.
I set up trades based upon what is LIKELY to happen, not what I HOPE will happen. While I always hope the market goes higher, I know for sure it won?t stay at the top. The prices from five years ago won?t be available in most years. For instance, the last time futures were $4.50 was three years ago. It?s been four years since corn hit $5. Therefore, since $5 corn has not happened in the last three years, I need to be realistic that it may not happen again for a while.
Nevertheless, I?m still a farmer that needs to make a profit and I will always have more grain to sell. Therefore, I optimize my grain marketing strategy to take advantage of the market if it goes up, but also if it goes down. I even make trades where I profit if the market moves sideways. By taking into consideration multiple scenarios, I reduce my potential risk.
A plan can be as simple as writing a note on your shop door that tells you to sell some corn at desired levels. When that prices comes, listen to yourself from the previous months and remember you always have more corn to sell. Maybe not today, but for sure in 365 days you will.
If you?re not sure what prices to write down on the door, start with pulling the following numbers:
- Yields ? Pull the average yields for the last three years or even from the last 10 years.
- Expenses ? Pull the costs for fertilizer, equipment, seed, gas, etc. for the last three years. Other than fertilizer these costs don?t adjust much year over year (and even fertilizer price changes don?t change overall expenses on a per bushel cost that much).
I always plan for a normal year. Some years will be above average, and some will be below, but if I plan for average I will be right most of the time and certainly in the long run. When there is a good year, I bank that profit for the years that are more challenging. This allows me to ride out volatility swings in production, which has a big effect on breakeven points.
This plan isn?t a ?set it and forget it? thing. You?ll need to make adjustments as new information is provided. For instance, accepting $4 corn this summer was tough when weather appeared grim, but those that did are glad they did today (even if it was just on 10%). Knowing this, some farmers may consider selling even just 10% of 2018 crop for $4 if we see it again, in case prices don?t rally.
Bottom line: farmers need to stop speculating on prices and trying to hit the top all the time. It?s impossible to do every year. Sure, sometimes luck will be on your side, after all a broken clock is right twice a day. But, farmers can?t afford to be wrong for too many years in a row. Instead, farmers need to ?manage the market? to stay profitable year after year.
Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father?s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.
Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual?s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.
