“How can I avoid getting bullish when the market rallies and really bearish when prices drop?” was the sincere question from an Iowa soybean farmer this summer. My quick response was to spread out your sales and make scale-up sales as prices rally. On the long ride home, I had a chance to think the question through and would like to provide this longer, more thorough response.
Take a long-term view. Also, make sure you write out your plan. If you've purchased crop insurance or some type of revenue coverage, it makes marketing a lot easier. Review market information, call analysis tapes or visit Web sites first thing in the morning. It's easier to make the right decisions when you are well rested and before all of the rumors and other news events begin to cloud you're decision-making process.
Make incremental sales. A series of 6, 8 or even 10 small, new-crop sales will bring about a better average than one big shot for the top. That strategy is too risky and no one — ourselves included — knows where that top is.
Use the different marketing tools available. For new-crop soybeans, we have suggested hedges or forward contracts on up to 20% into the November 2002 and January 2003 futures. If you like the current price level but are unsure of your production, price using puts. Make new-crop sales only in the amount that you are comfortable with and use the sales method that fits you.
Use commodity price charts to establish price targets. The November 2002 CBOT soybean price chart shows an extended base with lows in early January and early May of 2002. The initial rally upward was 37¢ to the $4.87 high. The later rally was 52¢, up from the $4.67 low. This set up targets of $5.35 ($4.98 + 37¢) and $5.50 ($4.98 + 52¢). The producers who used price targets to place these offers were able to make some incremental sales at very attractive price levels — that at least today look to have been great new-crop sales.
Call your offers in. If you are making new-crop hedges — have Good Till Cancelled (GTC) offers in above the market. The same applies for puts that you want to buy at the CBOT — get the GTC orders in. With these volatile markets, the prices you can receive at noon can be significantly different than what is available at the close.
Make the best merchandising decisions. The corn market offers a carrying charge from the October lows to the March-July 2003 time period. Odds are good that your basis will improve substantially for corn once harvest is wrapped up. It is just the opposite for soybeans. The May 2003 futures are trading at a discount compared to the November 2002 futures. This again shows that holding cash soybeans into the South American harvest is the wrong merchandising move. If you have limited storage, sell your soybeans and store your corn. In both commodities, holding the cash crop off the market until 4-6 weeks after harvest is likely to pay big dividends as basis levels improve.
Finally, make decisions on what works for you. If you're in Iowa with a great looking corn crop and you are short of storage, your willingness to sell will be greater than a farmer in South Dakota or Ohio where the crop has been ravaged with drought. Make new-crop sales only in the amount that you are comfortable with and use the sales method that fits you best.
Hopefully, the farmer that originally asked the question can read this full explanation.
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.