While your grain marketing plan faces many headwinds, don’t be surprised when a few tailwinds provide opportunities for you to capture profits. Keep in mind these recommendations shared by four commodity analysts below.
[Read Part 1 of the 2019 Bull-Bear Outlook]
Mark Gold, Top Third Ag Marketing - The major input for this market is demand. Will the president reach a deal with the Chinese to bring back soybean demand into the U.S. market? Without a trade agreement, the U.S. and world carryouts will make a sustained rally difficult. Of course, should South America production fall short of expectations, the world will have to turn to the U.S. for protein. With the current carryouts so burdensome, it will take a major weather event somewhere in the world to tip the scales toward the bulls. The big difference this year is the carryouts. If there are no weather issues, grain prices could move substantially lower. Traders will also watch the value of the U.S. dollar. I will repeat what I have said before; breakeven has nothing to do with an effective marketing plan. Breakeven is critical to knowing how efficient your farm operation is when compared to other farmers in your area, but it should not enter into marketing. The market does not care what your breakevens are. Keep in mind: Some of the most bullish markets have started with the biggest carryouts. The only tool I would use for marketing 2019 crops is a long option strategy. Use a long put option to protect the downside. Use long call options to replace cash sales. Use long options and cash to manage the risk. This strategy keeps you in a position to take advantage of higher prices while protecting downside risk. If you are storing grain, it is important to keep an eye on the carrying charges that are available to you and your local basis. Take advantage of the “carry” by capturing deferred prices but use a hedge-to-arrive contract to sell the deferred prices, which keeps the basis open to higher levels this spring.
Ray Grabanski, Progressive Ag - The loss of a 25-million- acre soybean customer in China is a huge issue, but no one knows for certain how big an impact this will be due to shifting of importers’ needs between the U.S. and Brazil. China’s need for soybeans didn’t change, just their sources. At a $1.50 to $2 discount to the South American soybeans on world prices, U.S. soybeans will probably be the only source for non-China countries to purchase soybeans. The question is, how much of the 25 million acres are simply displaced and how much actually are lost? There are problems with waiting for breakeven. It might take a long time to get there and farmers might need money in the meantime. When it finally does reach breakeven, the price outlook will probably continue to improve as we work through the loss of Chinese business and regain it through other channels. So, the irony is that if you can hold on long enough to reach breakeven, it will pay much more to hold on even longer as prices will likely continue to improve—prob- ably at an accelerated pace. Thereafter, prices will likely continue to improve. Its survival mode right now, selling what you absolutely need to and holding the rest as long as possible. Many tools will be fruitful, like separating the basis fixing from the futures fixing, as essentially that relationship hasn’t changed. We want to sell at high basis and futures prices, and those rarely occur at the same time. Storing cash grain and locking basis and futures at separate times than each are favorable can usually net another 10¢ to 20¢ per bushel on your net cash price. If the markets present a low cash price, low basis and large futures spreads, a storage hedge might be appropriate.
Angie Setzer, Citizens Grain - Like everyone, I’m watching bean exports. We’ve grown accustomed to tight global supplies and an export program loaded heavily on the front side of the marketing year. While of course the Chinese trade issues are in the forefront of our minds, I will watch to see if bean exports react to the larger supply availability by spread- ing sales and shipments out across the marketing year. I’m also watching ethanol demand. E-15 is a great addition, though it appears it will have a long battle in court before all is said and done. Due to the reduction in RIN value, we definitely need to see ethanol exports increase exponentially to help support ethanol grind margins and corn demand as we move ahead. In fact, I think corn and ethanol could be bigger beneficiaries of a resolution to the Chinese trade war. On the geopolitical side, I am watching developments in Brazil after the Jair Bolsonaro presidential election win. Changes his administration makes in domestic economic policy will have great influence on their currency and Brazil’s ability to be competitive in the global market. He also spoke out against China throughout the campaign, so how that relationship evolves could have a big influence on values and market structure as we move ahead. Because of ongoing uncertainty, farmers need to look at what has worked for them the past few years. Using a sold cash approach with bushels that need to move at harvest or to ensure cash flow needs are met is an excellent first step.
Bob Utterback, Utterback Marketing Services - U.S. consumers want the best product possible at the cheapest price; producers want profits like those in 2012. While U.S. producers operate in an industry where supply can respond quickly, it takes time for demand to develop. In 2019, I see producers holding a lot of unpriced corn in bins, waiting for a price event. The positive demand outlook is already baked into the price structure. So, with the deferred July 2019 contract at a significant premium to the nearby contracts, the burden of proof is squarely on the shoulders of the bulls. The bottom line is, unless a significant weather event occurs in a major corn or soybean production area, it’s difficult to see prices reaching levels where producers will be comfortable letting grain go. If the grain markets give us a strong weather event next June and July, don’t waste it on selling the 2018 crop. Focus on selling the expected 2019 and beyond crops at good profits. Consider fence row to fence row corn acres and limited, if any, soybeans. Prices above cost of production can be locked up for many corn producers, but not for soybeans. Be 100% sold if December 2019 corn reaches $4.05 to $4.20. Its imperative producers sell in a form that has flexibility. I like buying deep-in-the-money puts rather than selling futures or making cash sales. Buy deep-in-the-money December 2019 corn puts with a time value cost below 12¢. Automatically roll-up if a bullish price event occurs. If one can average out around $4.10 and in the fall of 2019 roll the December 2019 to July 2020 contract at a 25¢ carry, it would be approaching $4.35 futures equivalent before basis is taken into consideration. That’s a return well above all expected costs for many producers. When I contrast this with the producer who takes all the risk of planting and harvesting with no price protection, I fear that if no weather event occurs next summer, the price outlook could move well below cost of production, resulting in serious lows.
More stories from the 2019 Outlook series:
Bull-Bear Outlook 2019: A New Reality For Grain Markets
2019 Outlook: Corn Markets Hinge On Acreage Battle