It's a simple question really and one that is on everyone's minds. Even though I know I will be asked it numerous times by interviewers and others, it's never easy to answer in a quick sound bite.
Part of the problem is that the question asked is not what I hear in my head. The interviewer innocently says, "So what should producers be doing to protect themselves?" But my brain hears, "So, now that corn prices are at their lowest level in seven years and below their cost of production, how am I going to feed my kids, market man?"
Emotions can run high when prices run low and, unfortunately, there is no good snap answer when standing under the tidal wave of the next record harvest. But now that more are interested in learning how to prevent this from happening again (maybe as soon as next year?), here is a brief list of good marketing tips for any year.
First, start the calendar year by getting acquainted with the value charts that I write about each year based on USDA's cost of production estimates. Back in February, these charts showed an expected range for Dec corn of $2.96 to $4.44 a bushel and so far, Dec corn has traded between $3.15 and $4.49.
For Nov soybeans, the expected range of $7.80 to $11.70 also compares well to this year's actual range of $8.68 to $11.86. Because Brazil's harvest was looking so bearish this winter, I wrote that $10.38 would be a better target on the high end, but the original range proved to be just fine. The fact that neither corn nor soybeans has yet reached the low target can be attributed to this year's lower-than-expected supplies in Brazil.
Each spring, consider buying two inexpensive options for every 5,000 bushels of production -- no matter what the market outlook is. The first option is either a Dec corn or Nov soybean put which can typically be purchased in April for somewhere between 3 to 10 cents a bushel and take as much as 80% of the price risk off the table.
You don't want to spend too much as these puts will likely expire worthless, but they are a cheap supplement to crop insurance in the event of a sharp price decline and offer the flexibility of being able to cash out before harvest, if needed.
The second option idea was mocked on Twitter recently as being a waste of money and is often misunderstood as a speculation play, but that is not how I see it. When grain prices are low in March or April and not volatile as they were this year, buying a relatively inexpensive out-of-the-money Dec corn or Nov soybean call can help you market your grain in the summer when prices typically turn more volatile.
Last week's DTN article, "Ag's Wise Men Talk Risk" by Executive Editor Marcia Taylor referred to this as a "courage call" as it addresses the emotional difficulty of selling one's grain when prices are higher.
Aside from the corny name, a courage call is a good antidote for farmers who struggle to sell grain when the news sounds bullish or the forecast is for hot and dry weather ahead. By owning a call option before conditions get bullish as they did in early June this year or late June in 2015, the decision to sell grain at a profitable price becomes easier because the producer knows that the call will still allow him to benefit if prices go higher after the sale.
Keep in mind that any courage calls you buy are also likely to expire worthless if you hold them to the end, just as they probably did in 2015 and will again in 2016. But if they made it easier for you to sell grain at a higher price, they served their purpose. You may even find that once your grain is sold, you don't care if prices rally higher and decide to sell the calls back for an additional profit. The choice is yours.
As far as market indicators go, DTN's Six Factors Market Strategies are always good, but I have to give extra praise to two that have been especially helpful in these bearish times. Keeping an eye on futures spreads is the best demand indicator I know and has allowed DTN to see through the charade of USDA's faulty soybean estimates. Paying attention to commercial activity in CFTC's Commitment of Trader data has also allowed us to recognize areas of support at times like this winter when the crowd was excessively bearish.
I've written about other good ideas this year and can't cover the entire topic here, but hopefully our long-time subscribers will attest to the value of partnering with DTN in this ongoing, educational process. We continue to bring you the best of our research and thank you for your support.
For others looking at grain prices below cost and wanting a quick answer, how about something better than a sound bite? How about a free trial to MyDTN?*
* Try MyDTN for Free at:
http://www.dtn.com/…
Todd Hultman can be reached at todd.hultman@dtn.com
Follow him on Twitter @ToddHultman1
(CZ\SK)
© Copyright 2016 DTN/The Progressive Farmer. All rights reserved.