Marketing Behind the 8 Ball
The most daunting task for a grain producer under the best of circumstances is marketing. The 2013/14 marketing year is now presenting producers with challenges not experienced for several years. The corn market is locked in what appears to be an intractable downtrend. Soybean values are being underpinned by relentless strength in domestic demand (soy crush) and sizzling export demand.
Yet, the bottom-line remains that too many producers are holding onto too much unpriced production. Moreover, all too common is that the size of the harvested crops have exceeded their own guarded expectations. Given one of the wackiest of growing seasons in recent memory there was not any bedrock reason to believe row crop yields such as the U.S experienced were possible.
Actually, we’ve chockfull of a string of wacky growing seasons here in the U.S. The remarkably good yields of 2013 are perhaps not so surprising at all. Consider that the severely compromised yields of 2012 yields were in "remarkable" when viewed in the context of the extreme stress the crops experienced. However, for 2013 the unexpectedly good yields have unwittingly raised the percentage of unsold production to even higher levels.
The issue of better yields and bigger crop size as of this writing is by no means the Final Word. With history as a guide both corn and soybean yields and crop size are more likely than not to increase when the USDA/NASS releases its "Crop Production Annual Summary" on Friday, January 10, 2014. Reaching back into 20+ years of history, the odds are roughly 3-1 that the ‘Final’ Crop Production report will increase yields for corn and soybeans when yields have increased from the September to the November Crop Production reports.
And it will be in this timeframe that the trade will have developed a confident trajectory as to the real potential of the South American soybean crop. If seriously adverse weather hasn’t developed between now and then, it can be conservatively projected that SA soybean production will be in the vicinity of 156.0 Mil Metric Tonnes (5.7 Bil Bu). That represents a 9.3 MMT (353 Mil Bu) increase from 2012. No shortage of soybeans for the world. If this potentiality plays out, it begs the questions - at what price level will the March 2014 soybean contract be trading? Above $13 Bu –OR- below $12 bu? This scenario hasn’t played itself out, YET. But the point here is to get thinking about pricing that unpriced production.
Ideally, a market will present you with a steady and invariably uneven escalation in price – aka "uptrend". You sell into strength – "feed the bull" – as it were. But that bull market in corn is effectively over. The evidence to suggest the likelihood of resurgence isn’t compelling, in my humble opinion. So, producers are faced with what only appears as the classical definition of a dilemma - a situation requiring a choice between equally undesirable alternatives. Either sell at present historically "lower values" or wait and sell at even lower values down the road.
Now, the bull market in soybeans is more likely than not to have seen its last hurrah in late August. As noted, soybean values are trying to finesse robust domestic and foreign end-user demand. But again, that minuet is being played out against the backdrop of a developing and yet unthreatened South American soy crop.
Remember, you can still keep yourself in the game IF you do take advantage of current prices by purchasing soybean call options or bull spread call options. If you are not inclined to advance cash sales take a hard look at taking protection with the purchase of soybean put options. Option strategies can be designed for either near or long-term protection. Get proactive. The presently evolving dynamics of the soy market do not suggest a passive "wait and see" approach to your marketing and risk management is warranted.
We’ll revisit the critical matter of marketing corn and soy production in the next post. Also, on revisiting - the last EKAP post (Friday 11/8/13) was released within minutes PRIOR to USDA’s November Crop Production and WASDE reports. There were three charts presented with details of the patterns represented. And the opinion: "Regardless of what may come to pass in the wake of today’s USDA reports – it is unlikely that these basic chart patterns will be meaningfully altered in the long-term." The essence of those chart patterns haven’t changed since then.