Corn and soybean producers have just gone through some of the most volatile grain markets since 1995-1996, when corn prices rallied to over $5/bu. Those lessons should have been applied to the grain markets this summer.
Here are five lessons that have passed the test of time and worked well for farmers in years with great price volatility.
The news is always bullish at the top — just as it is bearish at the bottom. They do not ring a bell to start a bull market or to announce the end of a major up move. You need to be disciplined to keep offers in place and sell, even when the news is bullish.
Producers who made spreadsheet decisions — for example, decisions made based on an acceptable profit level — were incremental sellers this summer. When the dollars per acre add up, make the sale.
Scale-up sales — having offers in and making three to five sales of 10% — creates a great average selling price. Having resting offers to sell above the market is one of the key ways to take advantage of higher prices — and it takes a lot of the emotion out of the market.
Commodity markets go down twice as fast as prices go up. In two weeks you can wipe out two months of price increases. That's been especially true this year, with the commodity funds' huge long position.
Holding cash inventory is not always the best way to manage your money. With the potential for a large crop in South America, the soybean market is not offering any return to storage for soybean producers to carry the crop into next spring and summer. For producers who are willing to re-own, call options or futures out of some or all of your cash inventory in November will be a good move.
Even if you're in an area with a smaller crop, making the right marketing decisions on all of your bushels is very important.
“Doesn't the Board of Trade care that we have a crop disaster?” asked an angry Ohio farmer in early October. It's twice as frustrating to watch prices drop sharply lower when your yields are low as well. The reality this year is that we have a reduced crop, but demand for corn and soybean meal is down as well.
These are some key factors to consider:
The current estimate is that about 2-3% of the U.S. sow herd has been liquidated. Early indications are that as much as 10% of the sows have been liquidated in some of the western provinces of Canada.
Southeast Asian feed buyers have been buying large amounts of feed-quality wheat out of the Ukraine and other Eastern European exporters. This has hurt U.S. corn exports during the last two quarters.
China continues to aggressively export corn into Southeast Asia at large discounts to the U.S. corn price. Sales have been locked all the way into February-April of next year.
We've suggested using the “30-40-30” sales plans.
30% — We sold 30% ahead. We made several new crop sales recommendations this year with most farmers having 30% of the soybean crop sold ahead for off-the-combine or January 2003 delivery.
40% — We suggested getting another 40% (minimum) sold in the cash market now and then buying back the May soybean call spread as a way of maintaining some ownership.
30% — The last 30% will go under loan.
If a large South American soybean crop bombs prices lower, an LDP may be available in the May-June time period. You could then lock in the LDP on the first up day — and see if any weather problems develop in South America or the U.S.
Alan Kluis is executive vice president of NorthStar Commodity Investment Co. If you have marketing questions or want more information, write: NorthStar, 1000 Piper Jaffray Plaza, 444 Cedar Ave., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.