Brain power key to securing bright farmer rancher futures
Farm and ranch country may appear to snooze from the initial killing frost in October to the first warm days of spring.
Wheat sleeps through dormancy while cattle graze pastures and row-crop stubble, working to stay warm and hydrated, just before calving season.
But the humans involved in those operations are anything but idle. Chores are a given, and the major activity is between the ears of producers.
Farmers and ranchers rack their brains to be prepared for the vital growing season, 2021 and beyond.
They lock in prices for input costs, such as herbicide, seed, fuel and fertilizer, and may sign contracts to deliver grains at a set price, to assure income.
“This is a big time of year,” said Daniel O’Brien, of Colby, an Extension agricultural economist with Kansas State University.
“A lot of cash marketing goes on,” he said. “It’s also a time of financial planning and tax preparation.”
With commodity prices ranging from 19% to 31% higher than a year ago, producers are doing what they can to take advantage of the bump in potential income, without emerging too boldly or aggressively in pricing next year’s crop, O’Brien said, given the uncertainty of these times.
“There is some hesitancy to be highly aggressive in forward pricing for future delivery—especially for fall 2021 harvested crops,” he said. “The run higher in grain prices has certainly helped for farmers financial prospects, particularly for any who still have unsold grain from 2020, and probably has more of an impact on soybeans and corn growers given the relative price movement that has occurred.”
Those futures are from 23 to 31% higher than the same span in 2020.
For example:
• The March 2021 soybean futures closed at $13.74 3/4 (on some boards) on Jan. 8. The March 2020 futures closed on the same date last year at $9.47 1/4.
• For hard red winter wheat: March futures closed Jan. 8, 2021 at $5.94 3/4, versus $4.80 on the same date in 2020.
• Corn futures closed Jan. 8, 2021 at $4.96 1/4, versus $3.84 1/4 on Jan. 8, 2020, a $1.12 difference.
“Milo for us hit $6 (a bushel). That’s almost unheard of. Six months ago, it was in the 3s.
Soybeans are getting close to $13, and it was clear down in the 8s,” said Jerry McReynolds, a farmer and rancher in Rooks County, Kansas.
When prices were low, he was selling below the cost of production.
“That’s when you have to have a good banker," McReynolds said.
There is some margin in the current high commodity prices, but that can change quickly.
“The cost of production can vary because of your inputs,” he said. “When the price goes up, the cost of production goes up, but when the price goes down, the cost of production doesn’t go down much more than 10%.”
Prices this high haven’t been posted since 2012, when they were driven by extreme drought, O’Brien said.
“These (prices) are driven by crop production problems and export demand,” he said. “China is a player on the buying side.”
Production problems and logistical issues are occurring now in Argentina and Brazil, O’Brien said, and there are fears of the La Niña weather patterns in the United States that suggest a “higher probability of drought than usual, but it’s still quite early to predict with certainty.”
Good prices now can be interpreted as “a good marketing opportunity,” O’Brien said, reminding producers “the best cure for high prices, is high prices,” given what people do in reaction to them.
“It’s a two-edged sword. On the positive side, it’s a great opportunity for sales by farmers at higher grain prices,” O’Brien said. “We’re not just thinking about grain markets, but energy markets. In the corn supply balance sheet, with higher corn prices, we’ll need to have higher ethanol prices to maintain the profitability of U.S. ethanol plants. A lot of the current strength in the markets is built on export demand for corn. However, high corn prices might financially hurt corn-reliant industries, such as livestock feeding and the ethanol industry. Eventually, that may mitigate or soften the price strength due to exports in the U.S. corn market.”
A “normal tool” to lock in higher prices in the grain markets is to use options, he said, but those protections are costly right now.
For December corn, at $4.57 1⁄2 per bushel on Jan. 12, price protection with a put option at $4.60 corn futures would cost $0.45 a bushel, O’Brien said, plus brokerage fees.
“It’s like having insurance, but you can end up insurance poor,” he said. “For soybeans, I almost shutter at what it would cost.”
A November put option at the futures price on Jan. 12, traded at $0.90 to $0.95 a bushel, O’Brien said.
Thought processes for cow-calf operations are pretty routine, said Vaughn Isaacson, a farmer and cattle producer in southern Saline County, Kansas, but grain prices can change things.
“When grain is cheap, you figure out how to market some of your commodities through the livestock deal,” he said. “When grains are high like they are now, you might plant corn, and instead of chopping it, you pick it. You haul it out instead of walk it off.”
While there may be less dust on the county roads than in late June, plenty is happening behind the scenes in mid-America’s rural communities.
“I’m always thinking ahead, about what’s next,” said McReynolds.
“Once you get the crops cut, everything put away, the calves weaned and the cows on the stock fields, we try to get supplies ordered, and be prepared for the worst,” he said. “You look at the futures and see what can be done.”
There are meetings with bankers to talk about land and operating loans.
“We’ve re-written some loans to get better interest. You make the best decisions you can,” McReynolds said. “Sometimes all you have to do is wait a week and say ‘OK, that was stupid.’ Very seldom are you right completely.”
Situations can change quickly and dramatically, Isaacson said, comparing the soybean prices from August to now.
“If you could make $8.50 or $9 for beans then, you’d have thought you were a wizard,” he said.
While the outside is blanketed with snow, or glazed with morning frost, this is typically a time for farmers to be students, and learn from experts how best to proceed with their farming and ranching, to stay up with the latest from experts on everything from agronomy to economics.
“We in (K-State) Extension will have educational meetings and workshops to help farmers address these issues. In these settings we’ll work to help farmers think through how to manage the grain market uncertainty and risk of the coming year, both from a marketing sense and financially,” O’Brien said. “Those two things are hooked together.”
Educational opportunities have dwindled somewhat during this global pandemic.
“Everything is virtual, and you don’t get as much out of virtual,” McReynolds said. “You certainly don’t get the interaction. You don’t have the opportunity to talk with experts and other farmers, who we consider experts. Unfortunately, it has been shut down and it will be missed.”
Looking ahead a few weeks or months, O’Brien said there is optimism about prices, but there is a “geopolitical environment” to consider.
“We’re anticipating pretty good futures prices, but international and domestic politics are at play now,” he said. “There are more worries in the grain markets as we sit here early in mid-January 2021, than we have in most years. It could affect the overall economy on the one hand and commodities (including grains) on the other.”
Timing is not often on the producer’s side, McReynolds said.
“A lot of times, when prices go up, the producers have already had to cash it in,” he said. “But however it turns out, we’ll keep marching on.”
Tim Unruh can be reached at [email protected].
