Slide and ride (Grain Marketing)
(Editor’s note: Rob Davis is a professional grain market analyst.)
As planting season approaches and we jump back in the planter tractor, it has a little different feel this year.
It feels a little like that moment that a bull rider wraps his hand in the bull rope and pulls it tight.
The stakes have been raised this year by elevated grain markets and input prices.
The natural gas rally last week means that we can’t expect relief from high fertilizer prices.
The June Natural Gas contract almost hit $7.50 and, from a technical perspective, the trend looks like it could tack on another dollar.
I keep hearing people say that expensive inputs are causing high grain prices.
This is not true! Demand drives price, not the cost of production.
High inputs squeezing profits could reduce supply in the medium-term, but there will be a time when the grain markets sell off and we will all be below break-even.
That being said, I believe that global supplies of grain are too tight to see prices fall below breakeven this year or next.
Tight global supplies are having a compounding effect on the weather risk premium that we see in the corn and soybean markets this time of year.
Now is the time to be scale-up selling.
Grain buyers are already on edge with logistics problems and the recent soybean crop failure in Brazil.
Brazil, the largest soybean producer in the world, just lost 20 percent of its soybean crop to drought and poor harvest conditions.
We can’t stand to lose even 5 percent of our corn crop, which would be 800 million bushels or about nine bushels per acres.
On April 14, the May 2022 corn contract closed at $7.90 1/4 with December 2022 closing at $7.35 1/4.
With buyers already nervous about supply, any breaks in the market will likely be short lived for the next couple months.
On April 14, the May 2022 soybean contract closed at $16.82 1/4 with the November 2022 contract at $15.01 1/2.
I recently heard an analyst say “the higher the market, the more costly the mistakes.”
It’s hard to keep from doing the math — calculating how much money was left on the table because you didn’t sell at the high.
No one sells at the high and if someone says that they did, they’re probably not telling the whole truth.
Even though a low-priced grain contract feels like an increasingly painful mistake, our job is to sell grain at a profit.
If you’ve done that, you’ve done your grain marketing job.
Being aware of the increased financial risks and estimating their impact on your operation should be at the top of your priority list before planting season.
I’ve heard that farmers are afraid to sell next year’s crop because we don’t know what the world will look like, and I can relate.
No one was predicting that prices would be where they are currently.
Doing nothing may be the answer, but dedicating some time to considering what the world might look like in six to 12 months and how it would impact your farming operation will be time well spent.
On April 14, the May 2022 wheat contract closed at $10.96 1/2 and the July 2022 wheat contract closed at $11.04 1/2.
Last month I talked about wheat streaking higher — it will continue to be unpredictable and driven by the flow of investment dollars into, and out of commodities.
We benefit from premium wheat prices here in the U.S. that tend to stay well above the global export market.
This disconnect from fundamental value adds to the unpredictability of the wheat market.
One thing is certain: Volatility in the markets will be around for a while, but this ain’t our first rodeo.
(Editor’s note: Rob Davis spent 12 years in the finance industry as a portfolio manager and three years as a grain merchandiser and market analyst, currently farming on the Delmarva Peninsula, raising grain and poultry. Davis can be reached by e-mail at rob@RichLevels.com.)