Market Analyst Says Incremental Sales Are Good but a Balanced Approach to Marketing Is Better

What Happened

A price recovery in corn and soybeans has many farmers making sales, enjoying a pay raise, and generating cash flow to pay bills. Compared to just a few years ago, however, prices are still relatively low for both commodities. Because of this, the sales being made are incremental, and generally not large. Farmers feel as though they can’t afford to miss making sales and yet are hoping for higher prices to build a higher average sales price. There is merit to this approach, and it makes sense. Act, but don’t overdo it. On the other hand, prices have now rallied high enough that a more aggressive selling approach is warranted, as is a move toward a balanced approach.

Why This Is Important

Deferred corn futures prices in the upper $4-range, or even the low $5-range, are the best prices since last spring. Aggressive buying by managed money (also known as funds) has helped push prices higher. A net short position of near 350,000 contracts in midsummer to an estimated long position now near 300,000 contracts is a massive turnaround. A concern is that, if buying interest drops, fund liquidation could be swift and pressure prices sharply lower in a short period of time. Therefore, incremental sales, while productive, may not be productive enough. Instead, consider a balanced approach where your sales are more aggressive. You are generating greater cash flow and shifting a greater amount of risk. At the same time, you can retain ownership of sold bushels with the use of call options.

The buyer of a call option has the right (not the obligation) to own futures for a designated time at a certain price. For example, purchasing a July $5 corn call would provide you with the right to own July futures at $5, without the obligation. July options expire in the third week of June. Risk is fixed at the premium paid, plus commission and fees.

By selling cash and retaining ownership, you have created a balance. You have a known quantity of risk with the call option and, at the same time, eliminated the risk of cash grain exposed to the market price. You’ve also eliminated storage and interest payments, as well as basis risk (and potential). You now have ownership in the market with time on your side, in the sense that you get an opportunity to have the right to own the market through the remainder of the South American growing season and early start to the U.S. growing season.

What Can You Do?

Take action! As prices move higher, farmers do a good job of selling some bushels. As futures continue to move upward, many hesitate because they feel they could be making a mistake. Keep in mind that farmers, like anyone else, are only human and emotion does play a part. Talk to your advisor and develop a strategy where you can sell cash grain and retain ownership with a risk and potential that fits your needs and goals.

Find What Works for You

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation rather than emotionally-charged responses to market moves, which are always dynamic.

Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: (800) 334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.