Market Commentary for 10/3/17
Corn and soybean yields continue to exceed farmers’ expectations across the Midwest, suggesting USDA estimates may have been closer than many had thought. Prices continue to do nothing. Spreads between futures contracts have widened to levels unseen in several years for corn and even longer for beans. This and basis also dropping indicates the market wants farmers to store their crop.
I drove from Minneapolis to southeast Nebraska on Thursday and back on Monday. I was surprised how little had been harvested along I-35 and I-80 for this time of year. While I hope the bottom has been hit for the season, I wonder if the full effect of harvest pressure has kicked in. Time will tell shortly.
Having An Edge In This Market
When reading social media or listening to coffee shop talk it’s easy to be convinced that farmers are on the losing end of the market all the time. While this may be the case for some farmers, savvy farmers know they have an edge that most speculators don’t. The difference….farmers are always raising more crops and speculators really can't do this.
Why Is This Better?
It’s better, because when farmers sell during a rally (assuming above breakeven points with normal size crops) they should be at profitable levels. The higher the rally the more confident farmers are that the decision was correct to sell. Plus, farmers always have more grain to sell. Even if a farmer sells all of this year’s crop on a major rally, they can and likely should start selling next year’s crop.
Speculators don't look at their positions this way and don't usually have this type of flexibility.
How Should Farmers Use This Edge?
Many farmers don't understand how to use their edges to help them be more profitable. Following are some examples for a corn market edge.
Edge #1 – Market Carry - when the price of grain in the future is worth more than current values.
Using market carry and moving sales forward in time, allows farmers more flexibility in accepting some missed opportunity in the market. Market carry has historically been available in the corn market most of the time, especially when there is significant carryout, like we have today. Inverses, when future months are lower than the current month, happen less often in corn (note, this is not always true of the bean market).
For example, I could sell $3.50 today (off the combine), or I could store it and next summer get $3.80 against the July ’18 corn futures. If prices are way above that value next summer, I will likely be able to capture market carry again by moving the sale to July ’19 corn futures for what should be about 40 cents of premium (the 40 cents carry estimates is based upon typical historical trends during significant corn carryout’s like we have now ). This would turn the original $3.80 sale (if I made it today) into $4.20, but for the 2018 crop if I store it until Summer of 2019. Then my current 2017 corn that I am going to store would be freed up to take advantage of the higher prices next summer.
While I would probably only do this if July '18 corn next summer goes above $4.00, the example shows how time and the availability of future production allowed me to capture additional profit during a less than ideal market and leave some upside opportunity open. In this scenario, using the flexibility of market carry, I was able to average two crop years above $4.00. However, if prices next summer are lower than $3.80, say $3.50 like they are today, then I will have made the right decision to sell some corn at $3.80 today for next summer shipment.
In other words, by waiting and using market carry all the while knowing there will be another crop next year, I can take advantage of premium in the market that is low risk and historically extremely frequent. Speculators can't always do this.
Edge #2 – Crop Insurance
Crop Insurance allows me to forward sell up to whatever coverage level I buy protection for on my production with substantially less risk. Crop Insurance doesn’t guarantee me a profit, only a certain amount of production. This year shows that in some parts of the country a farmer could have suffered a loss on yield, but the price doesn’t even remotely get to a level of breaking even. Here it is about minimizing loss. Selling forward on good rallies this year could have been an edge.
Again, speculators don't have this advantage. They fear ups, downs, and sideways markets because missed opportunity for them can mean a straight up loss. Farmers should only fear the market going down, sideways markets might mean the only way to make money is the market carry, while the upside is technically unlimited. No matter how high the market goes, it is almost always beneficial to farmers because they should always have more crop to sell at some point in the future. The problem is that nobody ever knows where the top is.
Edge #3 – Crop Adjustment
Farmers can switch between corn, beans or even wheat based upon the profit potential when planting. Farmers can and probably should even sell their crop at a profitable price even before they grow it. Maybe not all of the crop right away, but certainly a portion, and then continue to be a scale up sellers.
Obviously nothing is a guarantee or works every year. Selling too soon can still be a wrong decision, but these edges can help soften the blow of being wrong. I don't know where the market is going any more than anyone else, but I take advantage of all the edges I can to maintain as much flexibility and opportunity to available premiums in the market.
Many farmers don’t think this way. Most of this thought process runs counter to everything farmers have learned or done in the past, but in the long run it has much lower risk for farmers and more opportunity of higher profits. The most progressive farmers are using the edge they have to their benefit. They are choosing NOT to be a speculator.
Superior Feed Ingredients, LLC
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