There is no “bailout” in commodity markets — just risk. It makes me crazy when someone says, “The bulls were bailed out by Chinese buying.” Or, “The bears got bailed out by those rains.”
To be “bailed out” implies you’ve picked a side. As a producer, it’s OK to be bullish or bearish – but your outlook should be a low priority. As a producer, your outlook should not change daily – it probably shouldn’t even change weekly.
It takes an extended period of evidence and confirming price action to turn longer term trends. The 2020 rallies in corn and soybeans started in August, but it took all of September to confirm the move. There were some daily indicators, however, that hinted at a recovery from depressed prices.
Evaluate Basis Daily
The futures market can send false
signals, but the cash market can’t lie to you. Another one of my favorite sayings: “This is too complicated for futures ... the cash market will have to sort it out.”
Activity in the cash market is that telling — it’s insight into supply and demand down to the local market. Start your daily evaluation of risk with basis.
- If basis is above average, use strategies that capture basis. Strong and strengthening basis is a signal supplies aren’t keeping up with demand, suggesting higher futures prices ahead.
- If basis is below average, use marketing strategies that leave basis open to capture upcoming basis appreciation. Weakening basis means demand has been satisfied or supplies are beginning to overwhelm demand — suggesting lower futures prices ahead.
Starting with the basis market to determine whether you have a bullish or bearish outlook for futures prices reduces the risk of a false signal from futures. But 2020 proved attitudes can change quickly.
Corn demand destruction in the fuel market was eventually offset by unprecedented demand from China. China’s demand for soybeans worked with a dry end of the growing season to slash expected bean carryover.
Things change. That’s why there is no bailout, just risk to manage.
Be Flexible, Be Ready
I’m in favor of maintaining flexibility in risk management. If basis is strong, capture it by making a cash sale. But be prepared to reopen upside potential with a long futures or call option position.
If basis is weak, use futures/options to lock in price but leave basis open to capture likely appreciation.
It’s simple, basic risk management, and it works. No excuses ... stay active in managing your risk.
