While the slow harvest is keeping corn prices from tanking in the short-term, the inevitable huge supply is limiting any upside potential. The latest USDA estimates haven?t helped either. While they reduced acre estimates, yields also increased. So, there was little price impact. It?s doubtful that even a South American weather scare would have much impact at this point ? 2.3 billion carryout of corn bushels is just too much. I expect a sideways corn market for several months.
Soybeans, on the other hand, were handed a nice surprise by the USDA, as they lowered the upcoming carryout estimates. The USDA is often criticized in their ability to estimate soybean demand, so many think lower carryout potential is a possibility in the ?17/18 marketing year. While the USDA?s recent track record has been shaky, exports are behind estimates this year. For a bean rally to continue, exports need to catch up. For the next few months any South American weather scare could have a big impact on prices.
What is in your tool box?
Last week I explained the many benefits of forward selling using futures and why margin call should not be a reason farmers aren?t doing it. When farmers don?t use futures as a part of the grain marketing strategy it?s like a farmer who goes to the field with only a hammer, screwdriver, vice grip and crescent wrench in their tool box. While farmers could fix some problems with these tools alone, they will be much more effective and efficient if they have a more diverse set of tools. Let me explain.
The hammer
It?s easy to understand what will happen when you use it. But, it doesn?t give you very many choices. Hit something just right, and all the problems are solved. But, swing too hard or in the wrong spot, and you can break something. The hammer is the equivalent of selling cash grain. Every farmer knows how this will work. They have had successes and failures in the past, but it?s pretty easy and takes little skill. Selling at the right price at the right time (a direct hit) feels great. But, selling at the wrong price or time is hard to fix and causes frustration.
The screwdriver
The screwdriver is also an easy tool to use, but very limited in function. It can be very useful in the right situation, but unless you have the right screw or bolt, this tool may not be the answer. This is similar to just counting on Insurance Revenue Programs or Government Payments to help set a floor price or make up for any short fall in prices. It?s an indispensable tool you can?t live without, but it won?t fix everything.
The crescent wrench
When you aren?t sure what size of bolt you need to loosen (or maybe you have a surprise metric bolt you have never encountered) the crescent wrench can come in very handy. However, if the bolt is really tight you can round off the corners of the bolt or nut, and be in an even worse position. This is similar to buying a put or call option. There are times buying a put or call can be just the right ?tool? in the marketing world. However, there are situations where it doesn?t work as well, or makes a problem worse than when you started. In less volatile markets like this previous year, options can cost farmers more than they can potentially gain from them.
The vice grip
The vice grip is a companion tool with any of the above tools mentioned. You can keep your fingers safe using a vice grip to hold a nail when using a hammer. Or a vice grip can work with a screwdriver or crescent wrench to hold a nut in place when screwing in a bolt head. This is like selling grain to an end user. It can be handy on its own, or use it with other tools, like Hedge To Arrive, minimum priced contracts, or deferred pricing. However, it can lock you in tight, leaving you with limited options. What if there are production issues? What if there is another end user paying more in the future? Flexibility is often limited.
What?s in my tool box?
Obviously, I have the above tools in my tool box, but I also have other tools available to me that best fits each situation the grain market throws at me.
Socket set
I have a complete standard and metric socket set that fits any bolt in need of repair. I want all sizes and extensions available for the right task. Futures, like sockets, give me flexibility and allow me to pick the exact price I want to sell grain at. Deep sockets are like using Deferred contracts that allow me to sell late in the year and pick up market carry. Different drives are like futures contracts that allow me to pick the right year to market. All the extensions are equivalent to how futures allow me to take advantage of basis opportunities. While a little heavier to carry, keep organized and more complicated to use, the flexibility of what I can do and how much I can fix is worth it.
Open ended box wrenches
This year I added another tool to my marketing tool box. Sometimes sockets don?t fit and I need an open ended box wrench to reach a difficult bolt head or nut. While not as handy as a socket, it can be the perfect tool for a very specific and tricky fix. This is like using Straddles in a Sideways Market. Straddles can allow farmers to increase profits in a stubborn sideways market. I may not use them all the time, but when a futures contract isn?t good enough to meet profitable price points, these types of trades can help give me a little extra. Often straddles can also easily compliment futures trades, like using a socket on one end of a bolt and an open ended box wrench on the other.
WD40
Sometimes a little extra help is needed to loosen tight bolts. This is like selling calls. Does it work all the time? No, but when things are tight and none of the other tools are working, a little extra premium that I can pick up and add to a future sale is all that?s needed to get the job done.
Next time you knock a sickle out while cutting beans, or have to fix a broken gathering chain on the corn head, ask yourself what tool will do the best job and what do you have in your tool box. Your grain marketing tool box should be just as diverse, so you can take advantage of every opportunity and challenge you will face.
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.
