Flexibility is King

June 24, 2017 02:14 AM
 
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Normally we learn more about a crop as late spring turns to summer. This year, the outlook will likely be less clear, which makes flexibility all the more important. While I preach discipline in marketing—understand, design and stick with a plan that will assure success—you better have a Plan B or C.

The way I see it, here’s what we know about corn and soybeans:

  • Old-crop corn and soybean stocks are big.
  • South America will be a stronger competitor in corn and soybean exports than in 2016/17.
  • 2017 corn acres are estimated to be down 4.3% from 2016; soybeans acres are expected to be up 8.2%.
  • Corn use in 2017/18 is expected down 2.4% from a year ago; soybean use is expected to be up 3.5%.

Old-crop stocks cushion supply, but there’s still risk. USDA says we’ll use 14.3 billion bushels of corn in 2017/18, but production is projected at 14.07 billion bushels. Beginning stocks cover the shortfall, resulting in a mere 3.2% downturn in corn carryover.

Soybean production is projected at 4.255 billion bushels, which will cover expected use of 4.235 billion. However, big beginning stocks push total new-crop supplies well past expected use, increasing carryover 10.3%.

USDA’s projections are based on trendline yields and USDA’s March Prospective Plantings Report. A 5% decline from expected trendline yields would cut at least 700 million bushels from the corn supply and up to 215 million bushels from soybean supplies. That’s enough supply-side risk to merit a flexible marketing plan.

These strategies provide the flexibility to act when opportunity knocks: 

  • A minimum-price contract (sell cash grain and buy a call option) locks in a price but also enables you to capture a portion of gains in the futures market. The minimum price is the cash price minus the call option premium. Because the most that can be lost on a purchased call option is the premium, the minimum price can be calculated. If the value of the call option appreciates, the increase in the premium is added to the cash price. 

Selling grain in the cash market and establishing a long futures position captures all upcoming price gains but leaves you exposed to unlimited downside price risk. The net selling price is the cash price plus any change in futures, which could be negative if futures turn lower.

  • A cash-market strategy with flexibility is the trap strategy, which was developed by Pro Farmer years ago. As the market climbs above resistance at the first sales target, that resistance then becomes support. If that support level is broken, a cash sale is made. However, if that support level holds and futures clear a higher resistance level, move the “trap” up to that level and increase the amount you’re willing to sell when the higher support level is broken. This prevents you from becoming more bullish as prices increase. You’ll never sell the high with a trap strategy, but you will concentrate sales near the high.

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