January’s U.S. Department of Agriculture’s World Agricultural Supply and Demands Estimate report cast a bearish net of fundamental news for corn, soybeans and wheat.
The overall theme of the report was an increase in supplies in the United States and around the world. The notion of higher supplies may keep grain prices in check in the short term.
However, perception can shift quickly, and a change in weather forecasts for South America or for the U.S. this summer could quickly change price perception from negative to positive.
From a marketing perspective
Be ready for potential price volatility. The key is to understand that you can manage volatility by positioning yourself for both higher and lower prices, despite the outlook.
Let’s be honest, none of us know what the future holds for grain prices in the short term. A strategic approach allows you to be mentally and emotionally ready for whatever the market does in the coming months.
What does a strategic approach look like? For grain farmers, this means forward contracting with your local grain elevator/ethanol plant to capture high prices on approximately half your expected crop. Regarding the other half that is not priced, consider purchasing put options to protect against a price drop.
Put options protect a price floor when purchased. Puts give you the right (not the obligation) to be a hedger (seller of futures). If futures prices decline, you can either exercise/change your put into a short futures or sell/exit the put you had purchased.
What if prices rally? Your put will lose value, but keep in mind, the other half of your expected crop production is still unpriced and can increase in value.
The forward contracted bushels cannot participate in a price rally. However, if you purchase call options on those bushels, now you have re-ownership. Call options can participate in a price rally and, if they have value, can be sold or converted into a long futures position.
Prepare yourself
The end goal is to position yourself so that, no matter what the market does, you are able to participate in a price rally or decline, for all your expected production.
This helps reduce emotion from your marketing plan and allows you to have confidence in your marketing decisions. Of course, these strategies require management and should be discussed thoroughly with your adviser. Make sure you’re implementing marketing strategies that best fit your risk tolerance.
Take time now to map out the potential scenarios for the coming months for why prices could either make new price highs, or potentially slide lower. Marketing is how you get paid for your hard work.
If you have questions, you can reach Naomi at [email protected] or find her on X (formerly twitter) @naomiblohm.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. 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. Total Farm Marketing refers 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. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. A customer may have relationships with any of the three companies.
