Lean on priorities when facing a fork in the road (Grain Marketing)
I was driving down a back road in Caroline County, Md., last week when I came to a four-way stop intersection.
It was then that I realized that I was not on a back road, but I was about to be — all three roads leaving the intersection were dirt roads.
During my life, all county roads on the northern end of the Shore were paved, although I’m pretty sure that the road that I grew up on was, and is, a rougher ride than the dirt road that I traveled on that day. Side note — some credit due here to the Caroline County road crew for a smooth ride that day.
And if anyone from Kent County (Md.) road crew happens to read this, please leave my road as-is — the volunteer speed bumps probably keep the through-traffic low and slow.
The fork in the road reminded me of the decision that farmers are facing in the grain markets right now. There is rarely an easy decision in grain marketing, but it is especially hard to sell grain when you know that the price is a good bit lower than it was recently.
This is the case for both corn and soybeans.
In my opinion, the corn market is more important to watch at the moment.
Futures price plus basis at harvest can get you close to $4 cash price.
Most years, including the last two, prices have slipped down to $3.50 and below during harvest.
As of Aug 8, the December contract was $3.85.
Demand for corn has been strong, but USDA demand estimates have been revised higher in response.
Right now, the average analyst yield estimate is 176.2, not far from the record set last year at 176.6 bu/acre. In recent years, yield estimates tend to rise as we get into harvest, which adds to seasonal price pressure.
The trade war will continue to give us a rough and unpredictable ride this year, and likely into next year as the WTO works through the case.
I expect the trade war to continue to weigh on the soybean market, causing farmers to shift acres over to corn next year, which will keep pressure on corn prices as well.
The conservative strategy here would be to add downside protection at current levels, while leaving some upside potential open.
This can be accomplished with a structured contract like a Min/Max.
The cost of the downside protection is reduced by selling away the upside beyond the maximum price.
I am still in the camp that believes that we will get a farmer friendly trade deal, but the timing will be difficult to predict. I would use a 12- to 18-month timeframe as the base case for your marketing plan, and then cross your fingers that it doesn’t take that long.
The November soybean contract closed at $9.10 on Aug. 8. We expect the rough ride to continue as the soybean market reacts to every headline and tweet like an old Mack truck riding across the rows.
I’d look to use this volatility to your advantage if we get some good news and the market reacts sharply. Based on current estimates, China will run out of soybeans in October.
They’ve tried to refrain from buying U.S. soybeans, but on July 29, a cargo ship of soybeans departed Kalama, Washington for Shanghai, which was the first shipment of soybeans to China in three weeks.
We knew that they would need to continue to buy soybeans from the U.S. despite the steep tariff, so while this is noteworthy, no one is surprised.
The bright spot right now is the wheat market as we’ve pushed through the highs of last year.
On Aug. 8, the September wheat contract closed at $5.70. Technical analysts are pointing to strength on the charts, which indicates that prices could continue to rise.
Wheat yields are difficult to predict when they are in our back yard, so the market is having a tough time estimating drought damage in Europe, Russia and Australia.
Selling into the story is the best strategy here, bringing your average up as you go.
One option to consider would be a minimum price contract, as the cost is a lot easier to swallow when you’re not far off the highest price that we’ve seen in more than two years.
Either way, this decision should be the easiest of the three grains right now.
A good route would be a simple forward contract and putting some gravel in your travel.
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