6 Strategies for Selling the Rally

January 11, 2016 04:08 PM
 
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Just like the producers he talks to, Ed Usset is ready to see grain prices get out of the doldrums.

“We desperately need a rally,” says Usset, a grain marketing economist at the Center for Farm Financial Management at the University of Minnesota. “Usually after harvest, you sell the rallies—but we haven’t seen much rallying.”

Yet as 2016 gets underway, there are plenty of reasons the commodity price outlook could change in an instant.

“You never know what is going to ignite a market,” Usset says. “It could be the floods in the Midwest, there could be problems with the wheat,” or crop-threatening weather might emerge in the U.S. or South America.

Whatever and whenever market-moving events might be, though, analysts agree growers need to be ready to act—or risk missing what could be one of the year’s few significant rallies. (With USDA releasing a wealth of reports Tuesday, anything could happen.)

“Certainly in the moment, everything seems very dark and very bearish, but I’m very optimistic that there’s going to be a few opportunities along the way between market structure, weather and a number of other (factors),” says Mike North, president of Commodity Risk Management Group in Platteville, Wis.

Spot the Opportunity

Yet identifying a worthwhile rally can be tougher than you might expect in such a challenging market cycle. Even when big price jumps occur, some growers are tempted to hold tightly onto grain in the hope of ever-higher prices.

So how do you know when to act? Here’s what the experts suggest for the months ahead.

Remain realistic. “We’re not looking at $5 corn and $12 soybean scenarios—more like $4.20 to $4.50 corn and $9 to $9.50 beans,” North says. “We have to make sure we’re framing up a plan to take advantage of those types of prices.”

Choose your numbers. “You need to have a minimum price objective tied to your cost of production,” Usset says. “Of course, there’s no guarantee we’ll get that … . That’s the son of a gun with agriculture.” Once you’ve established your minimums, you need to think about the higher side. “What’s my number where I sit up and say, ‘OK, it’s time to take action’?” he asks.

Watch for events. Some pay less attention to grain prices and more attention to what is moving the market. Identifying a rally worth selling grain is “less about what the price would be and more about what the event could be,” says Andy Shissler of S&W Trading in Downers Grove, Ill. “You know it when you see it.” What are some examples? Planting weather, particularly if Mother Nature isn’t cooperating. Fund decisions, which can affect the market with the sheer speed and volume of trades. Funds can also provide a hint of whether the market is likely going up or down. For example, if the funds are cleaning out their grain and soybean positions, Shissler says, farmers ought to be selling too because it indicates lower prices are right around the corner.

Take advantage of volatility. With the possibility of price increases relatively muted in 2016, especially in soybeans, even smaller movements such as $8.50 soybeans rising to $9.50 might be worth capturing, Shissler says.

Plan to make spring sales. “Spring is ‘too-too’ season,” Usset says. “It’s too early, too wet, too hot, too dry. We get excited.” As a result, the market gets the jitters, too. The result? A reliable seasonal pattern of higher new-crop futures prices, which typically decline from May 1 until harvest. “The forces are against you after July 1,” says Usset, who recommends growers develop a pre-harvest marketing plan so they can lock in these generally higher prices for a portion of the year’s upcoming crop.

Be careful about rallies that leave you below breakeven. “I really want to be one-third sold on new-crop corn,” Usset admits. “But December ‘16 corn is $3.80, so I’m just not going to do it.” Could prices go lower? Certainly, but Usset’s not the only one who can’t stomach the thought of selling so far below the cost of production. “I’m not going to get fired up about locking in losses next year,” Shissler says. “Prices are low, but you don’t want to lock in (excessively low prices) either. You may just have to do damage control into the winter for cash flow.”

 

 

 

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