The 2012 drought has been a game-changer in almost every aspect of farm and ranch management, including production, financial and marketing, says Darrell Mark, adjunct professor of economics at South Dakota State University, during his Aug. 6 weekly Cattle & Corn Comments on the iGrow Radio Network. "With the widespread and severe nature of the drought, yield losses, while expected to be large, remain uncertain, thereby creating significant market volatility," Mark says.
Because marketing in such times is difficult, Mark says the importance of making sound risk management decisions increases. Here are some tips Mark encourages agriculture producers to keep in mind when making tough marketing decisions in today's market environment.
1. Price Trends Can Change Quickly. "The corn and soybean markets have been on a sharp uptrend for more than one month, which tends to reward sellers for waiting for higher prices," he says. "It's important to remember that prices will not increase forever, and when they do peak, they are apt to drop rather quickly."
He explains further. "Even current 'sell-offs' in the market – which are the result of speculative profit taking – can be 30-40¢/bu. The current daily price limit in the CME Group corn futures contract is 40¢/bu., which expands to 60¢/bu. on a day following a limit close lower (or higher). So, conceivably, the corn market could drop by $1/bu. in two trading days. And, the trading days come quicker than calendar days now that the market trades 21 hours/day," he says.
"While there isn't anything in particular that would suggest this will occur, remember that the feeder cattle producer didn't have much forewarning or early evidence of the more than $20/cwt. drop in feeder cattle futures prices this last month either," Mark says.
2. Forward Contract With Care. For many producers, Mark says physical delivery of bushels will be difficult this year if they lose a significant portion of the crop to drought.
"Be certain to read and understand the non-delivery clauses in any cash forward contract. Almost certainly, it will cost money to settle non-performance of forward contracts, often by the amount of futures price changes from the time the forward contract was initiated until the delivery date," he says. "Some grain merchants may also consider rolling the contracts into the 2013 crop year, but again, it may come at a cost."
He adds that Revenue Protection crop insurance can help offset some of these costs associated with non-delivery of forward contracts. To learn more about revenue protection read last week's Cattle & Corn Comments on iGrow.org.
Mark adds that even ranchers who are forward contracting their calves for fall delivery need to take precautions as they may need to move delivery dates up or decrease delivery weights.
"They might need to consider price slides on both the upper and lower side of the base weight contracted this year," he says.