Jon Scheve with weekly market commentary made on August 23, 2024
A recent headline caught my eye: “The Ugly Truth: 2023 and 2024 Will Go Down as the Two Largest Declines in Net Farm Income Ever.”
Initially, I was surprised by this article because I assumed most farmers would have the majority of their 2023 crop sold by now and at near breakeven levels. However, elevator managers and bankers throughout the US have confirmed with me that in general quite a few of their farmer clients don’t have all their 2023 crop sold and very few have started marketing for 2024.
In contrast, my 2023 crop was marketed at $5.90 long ago. And for my 2024 corn, I put on some simple floor protections last February that will likely provide a $5.00 floor value by next spring. Since these trades are still working, I don’t have the final number, but based upon where the market is currently at it seems highly likely that is where I will land. I will provide an update when the trades are completed this winter.
Why Did You Put on Protections in February?
In early 2024, I reviewed historical supply and demand reports by the USDA to estimate where prices could go by fall. It seemed likely that if the US produced a trendline yield, corn could trade below $4.00 by harvest. However, if there was dry weather, I expected prices to rally back to $6.00, or maybe even $8.00. I wanted to be prepared for either scenario to happen.
Looking At the Past
Since the ethanol mandate, spot corn futures have ranged between $3.50 and $4.00 over 50% of the time (red lines in the chart below).
For 30% of the time, prices have been above $6.00 (green line). Interestingly, the market has only been under $3.50 for about 10% of the time, and between $4.00 and $6.00 the remaining 10%.
This suggests that when the market needs to ration demand due to production issues, it surges above $6.00. However, when it needs to cut supply, it pulls back to under $4.
So, in February when prices were $4.75, I placed some trades that provided both downside protection and upside potential. That way I could benefit from either possible price outcome.
No Strategy Works Perfectly All the Time
Like everyone else, I have searched for the perfect hedging system that hits the top every year. Unfortunately, it doesn’t exist. The market’s job is to balance supply and demand with the unpredictability of weather and other global factors. Because we can’t predict the weather or world events, we can’t predict prices. All we really know is that prices will never stay up, down, or sideways forever.
This constant change requires a strategy that adapts to current market conditions. For example, the best marketing strategies to use for protection from 2015 to 2019, when prices were between $3.50 and $4.00, were very different than the best strategies to use in 2010-2012 or 2020-2022 when prices were above $6.00.
With around 20 years of grain marketing experience, I have found the best risk management strategies work about 75% of the time, while the worst market strategies can still work 25% of the time.
What Are the Best Marketing Strategies?
The best strategies avoid always trying for “home runs,” but also minimizes the possibility of “strikeouts.” Historically, US farmers generally raise a near trendline or higher crop 75% of the time. This means the best strategy would be to sell into spring and summer weather rallies, and/or have protections in place if/when prices drop from summer into harvest.
While there are many ways to protect an operation’s downside, my preferred method is a blend of options, spreads, and futures sales. However, even a farmer who only uses cash trades and sells with discipline can manage their risk and probably be ahead of the average over time.
What Are the Worst Marketing Strategies?
The “store it and ignore it” strategy is usually the worst performing strategy over time. This “strategy” can be very misleading because it looks great during years with a national crop failure. However, these years are impossible to predict and have only happened in 13 of the last 50 years, or 25% of the time. That means 75% of the time these farmers will be left with prices usually below average.
“I Used to Sell into Summer Rallies, but I Kept Missing the Top, So I Stopped”
I heard this a lot during marketing presentations I gave in 2014, and now again in 2024. When I asked these farmers why they abandoned their plan since it worked well in the years prior to the big rallies, they all said the same thing, “I stopped because my neighbors kept bragging about the $8 corn they were selling.”
I would then ask, “what did those neighbors say during the years when it didn’t work out so well?” They told me their neighbors were either silent or complained about bad prices.
Don’t Worry About Long Shots
It’s best to ignore farmers that brag about hitting the top in outlier years. First, I find many people don’t tell you about every sale they make and their average price for the year is probably lower than what they claim. It’s easy to sell one truck load for $8, but it’s much harder to sell the entire crop for that price. Second, even if they are telling the truth, those that managed to sell most of their corn for $8 in one year are the same people taking a low price in most other years.
Next week I will compare the performance of my strategy to the average farmer price for the last 16 years.
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