The financial downturn in agriculture has been numbing. To swiftly move from a period of incredible profitability to low or no profit shattered the financial stability of some farms. It’s not the 1980s with high interest rates, out-of-control debt-to-asset ratios and backward farm policy that encouraged other countries to expand production. But for some farms, it sure feels like the 1980s.
The economic downturn started as a cash-flow issue. Now a lack of profitability for four years has burned through working capital and debt exposure is rising (and earnings are too slim to retire debt). Financially, it’s not a good time in agriculture.
Adding to the farmer frustration, technology is advancing and production efficiencies are multiplying. Finding funds to keep up with technology to capture those efficiencies is the frustrating part.
Crops grown from 2007 to 2013 (with the exception of 2009) were basically sold when cash was needed, making it tough to screw up marketing. That didn’t work from 2014 to 2017. Higher-level spring prices on Revenue Protection insurance policies cushioned falling revenues, but the cushion was very thin in 2017. Many producers were able to offset lost pennies per bushel with increased bushels per acre. Extra bushels were a late-season surprise that lowered production costs, keeping financial balance sheets nearly balanced. This year, a greater number of growers won’t have the extra bushels and balance sheets will undoubtedly turn red.
End users still want your corn and soybeans, they just don’t want the bushels right now. Corn and soybean futures are “bear-spread” with nearby contracts at a discount to deferred contracts. It’s also referred to as a “carry market” in which the market pays you to store crops.
A carry strategy involves capturing that payment by buying front-month futures and selling May or July futures in a spread position. Your risk—and opportunity—on a spread is the price difference between the two contracts, not if prices go up or down.
The cash strategy route involves selling for summer delivery via forward contract (if basis is at or above the three-year average) or hedge-to-arrive contract (if basis stinks). Maintain upside potential with long call options.
Corn will likely remain a carry market if futures rise or fall; consider the cash strategy.
Don’t expect the soybean market to remain bear-spread; consider the spread strategy. USDA projects total use this year will increase 3.4% from 2016/17.
That’s conservative. In the five years leading up to 2012/13, total soybean use expanded just 1.9%. In the five year’s leading up to 2017/18, soybean use expanded 39.1%. If total soybean demand again outpaces USDA’s estimates, the carry in the soybean market will erode as the market attempts to pull supplies forward.
In tough financial times, it pays to be active. If capturing this opportunity (carry) in corn and soybeans balances your financials, or even makes losses manageable, don’t let the numbness overwhelm you.