Making a profit in chaotic grain markets

When it comes to marketing grain, it’s often hard to find the right fit. And now in an even more chaotic marketing time, it could be even tougher for soybeans and other grains.

Panelists at the 2020 Commodity Classic in San Antonio, Texas, told farmers how they might profit from the chaos in the market during the early riser session Feb. 27. Speakers included Bryce Knorr, senior grain market analyst for Farm Futures magazine; Edward Usset, grain marketing economist, Center for Farm Financial Management, University of Minnesota; and Matt Bennett, Channel Seed grain marketing consultant and a former elevator owner and farmer.

Knorr tried to answer a couple of questions he posed during his segment. The first was regarding recent trade deals and how they work for grain marketers. He reminded farmers to remember trade deals often compare apples to oranges.

“The trade deal talks about dollars. Commodity markets, we talk about bushels. Quantity,” Knorr said. “The trade deal uses a calendar year. We use a marketing year. So some of the numbers don’t really correspond to what we talked about in the markets.”

Knorr questioned how the total number of grain bushels needed for exports—some 80 billion—could be accomplished. He broke it down by crop. Soybeans account for roughly 50% of United States exports.

“That was true in 2017. It was even true in 2019,” Knorr said. “We started selling to China again, even though the totals were lower.”

Soybeans tend to have to do a lot of heavy lifting. He said the most soybeans the U.S. has ever sold to China was 1.6 billion bushels.

“So far year to date 2020, we’ve done about 40 million bushels,” Knorr said. “We got long way to go.”

Sorghum could benefit from the China deal and if it hits the maximum of 500 million bushels, it could be more than has ever been done before.

“We’ve only sold 10 million bushels so far to China,” Knorr said.

As for wheat, normally a lot of it isn’t sold to China. High quality wheat exports could reach 200 million bushels.

“Again, if the trade deal hits the maximum so far,” Knorr said. “We haven’t sold anything to China in 2020.”

For corn, about 300 million bushels would be equivalent to the maximum dollar value and bushels. There’s only been a “negligible amount so far” of corn traded.

“The trade deal is just starting to get cranked up,” Knorr said. “Obviously the coronavirus is impacting this.” 

Bulls or bears?

Another question Knorr proposed, is there any hope for profit? Some people are bullish and some are bearish, he said. Many opinions out there right now. He looked back at the profit-loss per acre going back 10 to 15 years from 2019. The U.S. Department of Agriculture cost estimate shows him there’s a loss with corn and soybeans at about $70 an acre. So even with lower commodity prices, corn and soybean profits were helped by lower costs and Market Facilitation Program payments.

“The same is true this year,” Knorr said. “Right now I think soybeans look a little better than corn. And I’ve got to wonder whether or not the corn growers are actually going to plant all the acres of people are talking about.”

Soybean futures were down during Classic and it had an impact on cash prices.

“We’re trying to make our lows, the soybean market is looking for proof,” Knorr said. “It wants to see some of those bushels get sold in China, and it’s going to be difficult to rally now.”

When talking trade targets, Knorr looked at the first USDA supply and demand for the upcoming year.

“Right now for soybeans, they’re fairly friendly,” he said. “Using their stocks for the forecast would suggest that we have the potential for a rally.”

Last year at this time, Knorr said according to the model, there would be no rally during March to May, and indeed there wasn’t.

“Of course they were in the grips of the trade war,” he said.

He also took a look at what would happen if there was just normal crop yields in 2020. In the past, there’s been a rally “most years” during June through November.

“We got one last year. And remember a year ago it didn’t look like we were going to get any type of rally,” he said. “But again, this is a very lofty goal. It would take some serious weather and some serious exports to achieve.”

Plenty of supply

Knorr believes it’s going to be difficult to do. He has his own supply and demand model, that he calls, “less friendly than USDA” to soybeans.

“I think we could see an average cash prices with average yields of about nine bucks,” he said. “And again, this model—same rally over 10 bucks. Last year’s projections from this model at Commodity Classic were $9.65 to $10.03. The high was $9.57 and a half. So you know, we got close to the least the bottom end of this projected selling range.”

Knorr thinks the problem with soybeans is the global supplies.

“They’re just too big. And I think they’re going to be going up again in 2020,” Knorr said.

He does believe there is a correlation between U.S. soybean stocks to use and prices—but it’s fairly weak. Globally is a little different story.

“Globally when you take a look at the global stock its a much stronger correlation,” he said. “So for both corn and soybeans, we have to think globally. And this has been true in the wheat market for a while.”

Knorr wrapped up with his final question, “is there anything I or you can do right now?”

“Markets are lousy, but we’ve got good basis, many places,” he said. “So we’ve got to move corn. Check the basis look for pushes. We also know when you got lemons, you make lemonade.”

Prices are very weak, and that has lowered the volatility in the options market.

“It’s running about 4% lower than normal for both corn and soybeans almost at the levels we saw last year during the peak of the trade war, but this is making options cheaper,” Knorr said.

If your marketing plan includes a line to cover sales with call options, now is the time to consider starting to buy because futures are cheap.

“Implied volatility is cheap, you’re still going to have to be paying for time value,” Knorr said.

Simple tips

Although Usset mostly talked about corn prices, when it comes to grain marketing he looks for a couple things.

“I’m looking for strong tendencies,” he said. “Nothing is 100% in the world of grain marketing, but we can find strong tendencies that we should pay attention to. And also I like to look for large differences.”

Usset introduced his cast of characters—Barney Binless, Aunt Tilley, May Sellers and Hank Holder. Barney plays a very important role in the explanation, as he represents the harvest price. He sells at harvest.

“Some people think that Barney selling everything at harvest is the worst marketer I have and that’s not true,” Usset said. “I’ve met a lot of people that the harvest price would be an improvement.”

Next is Aunt Tilley. She likes to keep things simple. She makes new crop sales in four months—March, April, May and June—and sells 20% each month. She’s willing to price her insured bushels. The final 20% is sold at Barney’s harvest price.

“She is averaging 17 cents a bushel. Better than Barney’s harvest price,” Usset said.

May Sellers is another cast member, and her tip is to have an exit plan. Usset questioned the audience as to whether they still have grain in the bin from last year.

“I’m going to tell you that May has an exit plan. You need one too,” he said. “Do you have an exit plan? Do you know what you’re waiting for? I know what you’re waiting for. You’re waiting for 25 cents more. Right?”

Waiting for a higher price is an issue. May likes to get something done at the end of May or first half of June. She’s beaten Barney by 19 cents a bushel, even with having to pay for a variable storage cost. But it hasn’t always been a pretty picture. There were times where the harvest price was better than the May price.

“If you’ve got unpriced grain in the bin, you’re doing exactly what May Sellers does,” he said.

Hank Holder is the last player in the cast. He holds onto his unpriced grain in the bin too long. Usset is breaking what he calls the 11th commandment of grain marketing—Thou shall not hold on price corn or soybeans in the bin beyond July one.

“He’s going to sell 20% of his crop at harvest because of storage limitations. He will pay variable costs of storage,” Usset said. “Hank’s not going to do too well in this competition, because he’s working the wrong end of this long term seasonal pattern.”

With Barney as the benchmark, Usset compared Hank and May. These two producers are doing the same thing—storing 80% of their crop on price.

“The only difference between May and Hank is when they make their final sale,” Usset said. “When they make their final sale, May gets off the bus in the last week of May. Hank Holder insists on holding that corn right up to the week before harvest, at which point he makes a sale.”

Sticking around longer costs Hank 41 cents a bushel relative to May Sellers.

“Now here’s the difficult thing about Hank Holder that I like to talk about,” Usset said. “Hank Holder goes home with the gold medal, not a participation medal, a gold medal. Roughly one out of five years, he beats the hell out of everyone.”

But the last time he was able to do that was in 2012.

“The only thing I can tell you about Hank is he will win again,” Usset said. “And yet, if Hank is winning, one out of five years, but manages to average 40 cents a bushel less than May Sellers. What does that tell you about the other four years?”

May has beaten Hank by more than 10% in 20 of the last 30 years.

“There’s about a 75% chance that one or the other is going to beat the hell up the other person,” Usset said.

Usset knows it’s a difficult environment for grain marketers and with the help of his cast of characters it helps farmers understand more what to do with their own grain. Aunt Tilly is “enjoying remarkable success over time with a very simple pre-harvest marketing plan.” May Sellers has an exit plan. That exit plan is based on seasonal standards that tell us by May and June we are to be out of there and it works. Hank Holder pays an incredibly large price for holding onto his grain too long, even though he has his moments.

“So I challenge you—what is your exit plan?” Usset said.

Bennett agreed. Revenue on the farm is what the profit per acre is and he cautioned farmers to know where they need to be and when there’s a rally to not wait too long.

“Put your offer in because people always tell me, “call me only gets to $4,’” Bennett said. “Problem with that is they’re going to say let’s wait till we get to $4.15. Play offense and not defense.”

Bennett, like Usset, said to have a plan in place.

“Have your plan in place now,” he said. “You don’t know when the market’s going to rally and you’re going to have a hard time not being handcuffed when it rallies because everyone’s thinking the same thing. It’s going to keep going.”

Kylene Scott can be reached at 620-227-1804 or [email protected].