Friday, July 16, 2010
The Challenges of Grain Marketing When Production And Price Are Both Uncertain.
While the grain market is not in “desperate times,” there is no need yet to take “desperate measures.” However, the market may be in “uncertain times,” and it may be time to take measures to manage that risk of uncertainty. So how is that done in a corn and bean market like we currently have?Seasonal trends used to be quite predictable. Supply and demand fundamentals always used to move the market in predictable directions. But those factors no longer seem to apply, and a combination of outside forces makes grain marketing much more of a challenge than it ever was. University of Missouri marketing specialist Melvin Brees writes that producers are continually asking for his help in understanding the corn or soybean market. And he agrees with their frustration.
Brees says there have been many examples of surprising turnabouts:
1) In late June prices seemed headed lower based on plenty of moisture and good crop condition ratings. Then the USDA provided surprises with fewer corn acres and smaller than expected third quarter corn and soybean stocks.
2) Corn and soybean prices rallied sharply. However, the USDA’s July supply/demand projections were near trade expectations and prices faltered somewhat. But prices have since shown strength with higher corn and soybean futures prices in recent trading.
3) Prices again appear to be in an uptrend, but corn and soybean prices usually begin to decline from late June or early July into harvest time so there is downside risk.
Complicating the issue have been production challenges, with uneven fields, nitrogen losses, significant holes in fields, and some soybean fields that were never planted because of the wet soils. Brees says the latter issues will have to be addressed in the August Crop Report. The only problem is that some farmers with unplanted fields, or fields with large pond holes, may have sold too much in their pre-harvest marketing plan. And those who did not sell are facing the potential for a large downside risk due to the conventional wisdom of a good crop about to arrive. Nevertheless, Brees says, “In spite of the uncertainties, history suggests that marketing should not be postponed until production is assured. However, risk and uncertainty suggest alternative pricing strategies and more flexible pricing tools.”
In his newsletter, Brees indicates that some market advisors advocate selling or holding based on certain market signals, such as making sales if prices fail to break through an overhead resistance level, holding if prices bounce higher off support levels, and following an upward trends with higher sales. And he says unpredictable markets may require the use of marketing tools that you may not have used before, such as options. Brees says an at-the-money put option may be expensive, but it will provide price protection. And he notes that such a risk management marketing tool would put soybean revenue in the upper end of the USDA price range and corn revenue in the lower end of the USDA price range. And he adds that experienced options users may be able to develop strategies that will manage risk at a lower cost.
The bottom line is that production and price uncertainty will continue according to Brees, who says that means for both supply and demand. That is a formula for volatility and a requirement for managing risk particularly if there is uncertainty about how much is in your field.
Summary:
The market has been full of uncertainty, about both supply and demand, and many outside dynamics have pushed and pulled on the commodity market in ways that make its direction unpredictable. Farmers with uncertain production are also challenged with how to develop a marketing plan, which may have to depend on various options strategies.
Posted by Stu Ellis on 07/16 at 01:19 AM | Permalink
Comments
Posted by: Grain Marketing at March 9, 2011 2:02AM
Difficulties in marketing nothing new to anyone. We all struggle to some degree. Some more than others.