Preparing for Multiple Price Scenarios

What’s Happened….

This past year, a common practice that many corn producers employed was locking in a basis contract. This was in anticipation of corn futures prices rallying and, consequently, benefiting. Unfortunately, just the opposite happened. Prices declined, and for many, the local basis improved. The opportunity to sell at higher prices was limited. After sliding in January and February, a small price recovery into mid-May occurred, and then prices quickly fell apart. For many, this has been a financial train wreck and perhaps just as important, a mental drain. So, what was learned and what can be applied in the year ahead?

Why this is Important….

With the benefit of hindsight, things are clear. It is easy to suggest farmers should have more sold in late fall and early winter. Sometimes, however, things just don’t pan out to expectations. For many, this expectation was a post-harvest price recovery. A higher yield estimate in January, weakening world demand, and good crops in South America kept end users buying only as needed. Speculators were betting on lower prices. Inflation and higher interest rates likely played into the buyers’ decisions, who needed to consider the financial impact of tying up long-term dollars. Yet, regardless of the reasons, learnings this past year are that it is important to prepare for multiple price scenarios and implement strategy accordingly.

As an example, purchasing puts to protect lower prices, whether crop is in the field, in storage, or on a basis contract, was an option if wanting to establish a floor, while leaving the upside open for price improvement. Storing crops has benefits, yet this can be costly without a plan to defend a price drop. Though storing grains buys time for a price recovery, you are taking on market risk (prices dropping), basis risk (and opportunity), and the cost of money. This past year, basis contracts were attractive at the time of implementation, and sliding prices proved costly.

What can you do about it?

As you think about managing the crop you produce, view it as an inventory. You are hiring yourself to manage that inventory. If someone hired you to manage their inventory, what would your boss expect from you? It may seem a bit odd to think about managing your crops in this manner. In the end, all decisions are measurable and have consequences. Regardless of your approach, ask yourself: What happens to value of my inventory when prices change? What if the price goes up a little or down a little? What if the price goes up a lot or down a lot?

Pre-planning strategy takes time and discipline. The execution also takes time and discipline, yet that is what an inventory manager does. Learn about the available tools to shift risk and use them to take advantage of opportunities. Have strategic conversations with your advisor to help you navigate through the markets and use the right tool at the right time to help you achieve your goals.

Find out what works for you….
Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally charged responses to market moves, which are always dynamic.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

Author

Bryan Doherty