Understand Commodity Market Pacing

May 6, 2016 05:00 AM
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Chip Flory, host of "Market Rally" radio and Pro Farmer editorial director, explains what all farmers should know about commodity marketing below. He will wrap up the 2016 Tomorrow's Top Producer conference June 16-17 in Nashville with insights into what the future of the marketing year might hold with a presentation titled, "How to Prepare for What’s Ahead in the Ag Markets." Read more expert guidance for young farmers in our new e-book.

"Manage expectations. Today’s lower-price environment is another effort to permanently move the demand needle further to the right to give the markets an opportunity to develop new sources of demand. That takes time. End users must develop the confidence that “enough” supply will be consistently available before expanding use.

"During these demand-discovery periods, increases in production typically outpace year-to-year increases in demand to drive carryover supplies higher. It’s the comfort of big carryovers that encourages end-users to eventually expand their total use.

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"Still, production growth should be reined in by tight margins and markets that offer just brief periods of profitability (which typically come when it’s most difficult to make sales—during the growing season, when production uncertainty is at its highest). Coming off a period of 30% returns on production costs makes it difficult to identify an “acceptable” return.

"Manage expectations to reflect the current demand-discovery period in the markets. Doing so should make you more willing to make sales when just slight profits are available, and to manage opportunity risk with low-risk option strategies.”

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