Written in late 2020, updated in 2023
The age-old problem is to determine when to price your grain. That task should be a two-stage process; basis and futures determine the cash price.
The easy stage is the basis, which is very predictable and the annual range is relatively small compared to the futures price.
The difficult stage is pricing (locking-in) the future price, which is very volatile, and some years, very unpredictable. The decision of when and at what price to lock-in futures, whether as an HTA, a forward contract, or hedge position, requires the same decisiveness - and sometimes nerves of steel.
When in doubt, you cannot chicken out. It is OK not to price futures, but the decision not to price futures should be an intentional decision rather than a non-decision to wait another day.
Pricing Factors
This is a decision-making tool we highly recommend:
What is the fundamental outlook?
If the fundamentals indicate prices will go higher, that is a reason not to price the futures.
If the fundamentals indicate prices will go lower, that is a reason to lock-in (sell) futures.
What is the technical outlook?
If the technical analysis is for an “up” market, that is a reason not to price the futures.
If the technical analysis is for a “down” market, that is a reason to lock-in futures.
What is the seasonal trend?
If the seasonal trend is up, that is a reason not to sell.
If the seasonal trend is down, that is a sell signal.
Is the current price profitable?
If you can make a profit at the current price, that is a sell signal.
If you cannot make a profit at the current price, that is a reason to wait to sell.
What is the tie-breaker? Profitability! If you can make money, price the futures. If you cannot make money, do not price the futures.
To a large extent, the fundamental and technical picture is like beauty; it is in the eye of the beholder.
Experts & Recommendations
On any given day, one can find a hundred technicians who will say the market will go down and another hundred who will say the price is going higher. The same is true of analysis based upon the fundamentals.
Therefore, you must do the work yourself. Spend several hours or more a week to gather information to form your own opinion. The alternative is to pay someone to do the research for you and transmit that information to you in words you can understand.
But it is not enough for the “expert” to say “sell” or “don’t sell”. Never take anyone’s word for it. It is not their grain! It is your grain and your life!
Make that person tell you why! What are the reasons the recommendation being given? Ask yourself if those reasons make sense.
The key for your decision is: Does the analyst’s reasoning make sense to YOU? You are a pretty logical person, or you would not be farming. Use your common sense to weigh the facts!
Now is the time to decide: will you do the market research to gather the information? Will you instead hire someone to do research and provide information so that you can make an informed marketing decision.
If you are going to hire someone, of course ask that person’s opinion, but you must make the decision. Do not chicken out and pass the buck. Pricing grain can certainly make a person humble; we all would love to not have to make that decision.
It is your farm. It is your family. It is your way of life. You make the decision.
There's Always a Plan B
The good news is that with all the market tools now available, there is always a “Plan B” opportunity. That was not true just a few decades ago because the marketing tools simply were not available back in the day.
If you are going to rely on someone else to do the analysis, now is the time to select that person.
When beans are at record pricing for the first time in years, is not the time to select an analyst!
Don’t be looking for an analyst who is a “yes man.” Many a farmer contacts one analyst after another until he finds one who tells him what he wants to hear. I say again, make them tell you why they expect whatever it is they expect. And then ask them, “We both know you may be wrong. Why do you think you might be wrong?” Listen to him! Does his reasoning make sense?
Farmers are willing to spend countless hours year-round to learn how to produce more bushels. However, there is just as much profit to be made doing a great job of marketing as there is in increasing yields.
Decide in the coming weeks how you are going to make the decision when to lock in futures this year. Make a plan, and stick to the plan!
Report Example
Every week, we send our recommendations to our clients. On October 6, 2020, we sent the following information to our clients about the corn market:
Corn Situation After the Close Tuesday, October 6, 2020:
December Corn Settled Yesterday at $3.85
Price Change Tuesday to Tuesday: up 20¼ cents
18-month high $4.23½ July 15, 2019
18-month low $3.20 August 4, 2020
18month range is $1.03½ cents
Yesterday’s closing price:
38½ cents below the 18-month high
65 cents above the 18-month low
USDA's old crop carryout in terms of days’ use: US = 60; world =100
USDA's new crop carryout in terms of days’ use: US = 62; world = 96
Pricing factors:
Seasonal Trend is Up
Fundamentals are Bullish, China’s price $4+ above US Price at the Gulf & cost $1.26 to ship
Technicals are Bullish
Price Above Breakeven? Maybe
Conclusion: Don’t Sell
Being Bullish on the Market
2023 update
When one is seeking to price futures in the top 25% of a given year's price range, it means 75% of the annual range the recommendation must be "don't sell."
To go a step further, what percent of the time does a futures contract price stay in the top 25% of a given year's price range? Way less than 25% of the time.
For example, during the 2021-2022 marketing year, spring wheat traded in an upper quarter of price range for 21 calendar days, which is 5.75% of the marketing year.
In the 2021-2022 corn marketing year, the price was in the top 25% of the annual price range 25.2% of the days. That is 74.8% of the days were a "Don't sell."
In the 2021-2022 soybean marketing year, the price was in the top 25% of the annual price range 6.8% of the days. That is 93.28% of the days were a "Don't sell."
You need to have a patience and a strategy to be successful.
If you think that sometimes an expert is not correct in expecting higher prices, which is entirely possible, you could sell your crop. That will eliminate down side risk.
If wheat prices do go lower, you will be a genius. If prices go sharply higher, buy put options and make the money on the way down you did not make on the way up and you will be a genius.
Comments