The Market Does not Care About My Farm
Jun 13, 2018
~~Market Commentary for 6/13/18
The warm weather combined with the constant rain showers are giving the corn crop the best chance at growing over a 180-national yield. December futures at $4.00 still has a lot of risk premium built in to it for a small dryness pattern. However, there are still over 30 days left until the pollination period is in full swing. Weather forecasts will continue to dictate market direction.
I drove from Minneapolis, MN to our farm south of Lincoln, NE this past weekend. The corn in northern Iowa looks very good and is certainly better than the corn in western Iowa. The corn on the hillsides between Des Moines and Council Bluffs looks ok, but certainly not perfect. The corn south of Lincoln will need rain within the next 7 days after high 90’s and wind for several days.
The Market Doesn’t Care About My Farm
While it’s probably not true, it seems like we get more than our fair share of droughts. During these dry spells it’s easy to get frustrated when the market doesn’t rally due to bad weather conditions affecting not only me, but other farmers in my area too. Then I have to accept the decreased income from lower yields and possibly unprofitable prices.
Just as a large hail storm doesn’t concern the market neither do these localized droughts. Small-scale crop failure doesn’t affect the market much, because there are always isolated dry conditions somewhere so it’s already “baked” into overall prices. The market really only cares about unexpected large-scale production issues that affect the national yield average. What is happening across Iowa and Illinois matters most. But, production problems in a fringe state (like mine in Nebraska) usually have little to no effect in the long run.
I need to take into consideration variable weather and yield production every year when developing my market plan, because there is no guarantee the market will be sympathetic if I’m hit with a drought (or too much rain if you are in Ohio). Obviously, the more bushels I produce the lower prices can be to maintain profitability, but as production decreases I need prices to increase to maintain the same level of income, which I know doesn’t always happen. I handle this uncertainty by using averages when developing my grain marketing plan.
The following illustrates my point. Below are realistic average yields for both dry land and irrigated corn combined for my farm and the cash price required to maintain $600 income/acre
• 210 Bu x $2.86/bu
• 200 Bu x $3.00/bu
• 190 Bu x $3.16/bu
• 180 Bu x $3.33/bu
• 170 Bu x $3.53/bu - Average
• 160 Bu x $3.76/bu
• 150 Bu x $4.00/bu
• 140 Bu x $4.28/bu
• 125 Bu x $4.80/bu
• 110 Bu x $5.40/bu
• 100 Bu x $6.00/bu
The variance in possible outcomes is so wide, that planning for anything other than an average yield production is kind of a gamble. Over the last 45 years the national corn yield has been at, or exceeded, a straight trendline yields 66% of the time. I have noticed a similar trend for our farm operation as well. Those are good odds. And since I’m a farmer who always has more grain to sell, I’m most comfortable “betting” on the outcome with the highest possible success rate, and that’s average yields.
While this strategy has the best odds for my farm, there will be years when I miss the big rally. That occurred in ‘10 and ’11 for example, but in ‘13 and ’14 planning for normal yields paid off for me and made up for the previous two years when it didn’t work. That’s why it’s important for me to always maximize my profit potential, even during years where I have record yields, because I’ll need to use that surplus income during the lean years when yields are disappointing and prices don’t adjust accordingly.
Superior Feed Ingredients, LLC
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