Market Commentary for 6/14/17
Corn showed signs of life with hot and dry weather forecasted throughout the Midwest the next two weeks. Realistically prolonged dry weather is necessary for a significant rally since subsoil moisture has been plentiful. Trend line yields are definitely still possible. Two good rains (one after Father’s Day and another after the 4th) is really all it takes to have a great crop.
The Downhill Slide Of Beans
Beans have dropped nearly $1.50 off their high earlier this year. Many traders expected beans to rally like last year, but this didn't happen for at least two reasons.
• Significant palm oil reductions due to El Nino last year forced China to grind more soybeans earlier this year. This caused an overabundance of soymeal sitting in storage right now. With palm oil production back to normal levels there is less demand for soy oil and with plenty of soymeal in storage there is no increased push for soybeans.
• This year the South American harvest was large, unlike last year's that was plagued with production issues. There is significant competition for bean buyers this year.
Combine this with all the beans still in storage, and the possibility of a rally has declined over the last few months. I suspected this might happen and sold most of my 2017 beans when prices were at profitable levels earlier this year. While weather is still a wildcard, I'm glad I did.
Earlier this year I sat in a meeting hosted by a large grain company. Farmers were "scratching their heads" over the high futures prices, because considering market conditions, beans seemed overpriced. When asked if anyone was selling, most said they would sell some, but most were going to hold out for $12 , like the year before. Unfortunately this year, $12 didn't happen.
In my opinion, sometimes it just pays to sell when prices are profitable and the market doesn't make any sense.
My Current Bean Position
I often describe the rationale and detail behind individual trades I make throughout the year. Since normally these trades only represent about 5-10% of my actual production for a given year, it's difficult to understand my overall position. Farmers should always roll up all of their trades to determine overall positions. So, in an effort of full transparency, I'm sharing my current positions.
POSITION - BEANS 2016 2017
Beans Sold 100% 100%
CBOT Price $9.30 $9.75
Market Carry $.30 est $.30 est
Basis on Farm ($.40) est ($.30) est
Cash Price $9.20 est $9.75 est
Notes: my ‘16 bean position is completely tied up in a futures position. I have no options in place or basis set for the ’16 beans. My 2017 price is a combination of futures and options with the worst case scenario shown (best case scenario is near $10.10). The 2017 market carry and basis estimates are what I’m expecting to receive right now.
Is your breakeven point too low?
Recently I heard an analyst tell farmers to determine their breakeven points and when the market gets to that price, farmers should sell some corn. In my opinion, this isn't necessarily good advice. What if 3 different farmers have breakeven points at $3.75, $4.10, $4.50 (on futures)? Considering prices in the last year, only two of these farmers would have priced corn and the farmer with a $4.50 breakeven wouldn't have priced any of their corn for the last 2 years.
What Is The Average Breakeven For Farmers?
The Universities of IA and IL published that a "typical" farmer's breakeven is about $4.20. Their values for seed, chemicals, fertilizer, etc were close to what I see farmers spending throughout the Midwest.
They also used custom rates for equipment costs, which I also recommend. However, this is where I see many farmers cheat. Often farmers use their equipment loans applied to their acres, which can be misleading. Applying more acres to equipment adds more hours on the machine. When it’s time to trade, a combine with 600 hours is worth more than one with 900 hours, so those additional hours need to factored into the equipment costs. That's why using custom rates for equipment costs is the more accurate estimate.
Most banks also suggest farmers include cost of living expenses in their breakeven and I agree. Farmers don't HAVE to farm. They could work elsewhere even if its part-time, so this cost needs to be considered.
Finally, the value of the land must be included in the breakeven. This is where farmers short themselves the most. Farmers who purchased land before 2007 have seen a significant increase in value. While loan payments haven't increased, taxes most likely have but that increase is small in the large picture. So, I think the most accurate estimate for land value is to use the going rate for land rent in the area. For instance, if a farmer's loan tax payment is $150/acre, but a nearby farmer is willing to pay $250/acre to rent the land, then the $250/acre should be used when determining the breakeven number (not $150). Even though you may not want to, you could rent your ground to a neighbor and remove the added risk of being a farmer. Most farmers don't think this way, but they should. As the saying goes, the goal is to work smarter, not harder.
Adding all of these inputs together, the average farmer usually has a breakeven of $4.00 to $4.20 on a futures level.
What About Basis?
This is a factor, but for simplicity of this article I'm only talking in futures prices. While basis does vary across the Midwest (i.e. OH is usually .10-.20, IA/IL is usually zero, NE may be -.40 and SD may be -.70). Ultimately the average basis in all locations usually works the futures levels back to the same price for all farmers across the country.
Land Owners - Getting All You Deserve
Farmers who had the good fortune of buying land at the right time shouldn't let this keep them from getting the best prices. These farmers may have lower break evens, so I often see them start selling too early. Then when prices take off, they may not have enough bushels to take advantage of better prices. For instance last year, some of these farmers started selling at $4, only to stop between $4.20-$4.50 because they didn't think they would produce enough. In other words, they weren't aggressive enough, and then became too aggressive, only to miss opportunity all around.
What If I Paid Too Much For Land in 2012?
When purchasing land it should be thought of as a 30 year investment. The excitement of increased land values in 2012 motivated some buyers to make purchases that may not be seen as the best purchase today. In some cases, these farmers have a loan payments higher than rent values (example: a loan tax payment of $350/acre on land that can only be rented for $250). In this case, I recommend that farmers still use the $250/acre in their breakeven, not the price you need, but the price you can get. If you don't, you might have a breakeven that is never attainable, like the farmer who needs $4.50 but hasn’t been able to get it for 2 years. Farmers in these situations need to shift their marketing goal to lose the least amount of money. Hopefully yields will increase over time or grain prices have a strong rally. Realistically though, this could take 10-20 years. On the bright side, it's already been 5 years, so things could turn around in very quickly or maybe in another few years. Hopefully these farmers have enough equity to ride through these problems in the meantime.
Bottom line - farmers need to figure the true going rate for farming their land when figuring their breakeven prices and developing their marketing strategy. Otherwise, their marketing goals could potentially mean leaving money on the table or not making a big enough profit for all the work and risk to be worth it.
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Even though the information contained herein is believed to be reliable, we cannot guarantee its accuracy or completeness, and the views and opinions expressed are subject to change without notice. Trading commodities involves risk and one should fully understand those risks before buying or selling futures or options. This data is provided for information purposes only and is not intended to be used for specific trading strategies.