Weather worries create crop pricing opportunities

Weather worries create crop pricing opportunities

Should you be forward-selling some of the bushels you expect to harvest this fall?

What’s going on in the corn and soybean markets? Are we having a seasonal price rally or is it something more than that? Are you surprised at how the markets have rallied after spending the winter in the doldrums? The price for new crop corn futures rose nearly 13% between April 1 and June 1. New crop soybean futures rallied even stronger, gaining 16% during that three-month period.

CROP PRICE RALLY: How long will this May-June rally last? Corn and soybean markets are running strong with worry about summer weather being too hot and too dry for U.S. crops. Weather models will be followed closely for the next several weeks or until the fear of not having a good 2016 crop is eliminated.

“I think the surprise is how fast the market climbed,” says Steve Johnson, Iowa State University Extension farm management specialist. “The likelihood is these are seasonal price moves. In May and June almost every year, we see a rally in old and new crop corn and soybean futures. That rally tends to not last long. In fact, when you look at the charts, usually around the second or third week of June, especially for corn, the market likes to peak. Then the market confirms there’s another large crop coming and we start seeing lower futures prices, as well as lower new crop prices.”

Why are we seeing more price strength for beans than corn?

Question: We’ve seen market excitement in soybeans this spring and into June. Why haven’t we seen that same kind of excitement in corn? “I don’t think the fundamentals are as strong in corn,” says Johnson. “Not even close. Fact is, the size of the Argentine soybean crop has been reduced because of weather problems, and we have less soybean meal available— so I’m not surprised at the stronger rise in soybean prices. The hedge fund investors love to jump in the market and drive soybeans.”

You remember about 10 years ago farmers and market analysts began talking about “beans in the teens.” And most people said, “yeah, right.” What are the chances of that happening this summer—soybean prices moving into the $13 range or higher? “I don’t think we’re going to see significantly higher prices than we have now, unless we get some sort of adverse weather. Odds of La Niña coming early enough and the U.S. Corn Belt having a hot, dry summer are only about 20%. So, I recommend you market your grain accordingly, with that potential weather timing in mind,” says Johnson.

Will La Niña arrive early enough to drive crop prices higher?

“Many farmers now believe the probability of La Niña coming early enough this summer to drive prices upward—meaning a hot dry summer— is much higher than the roughly 20% probability I give it. But I don’t foresee a higher probability,” says Johnson.

So, now is the time to be in tune with your marketing and take advantage of these recent corn and soybean price rallies, he adds. “The caution I have is: don’t try to borrow or store your way out of the situation, if a big crop ends up coming for 2016. Be in tune with good risk management planning. You should do the planning now so you can implement the marketing strategies and use the risk management tools.”

Few farmers take advantage of typical spring price rally

You can almost count on a corn and soybean market rally occurring nearly every spring, says Johnson. “It’s caused by the uncertainty about the size of the crops in North America and the rally will usually last until we get into June or maybe early July, until the size of the crops becomes clearer. After that, the prices often move lower toward the harvesttime lows.”

Farmers can take advantage of the seasonal spring rally by forward-selling some of the bushels they expect to harvest in the fall using various tools, such as forward contracts or hedge-to-arrive contracts, says Johnson. That forward-selling helps farmers lock in a relatively high price for corn and soybeans, generating cash to pay for fall and winter expenses. Selling the crop early also helps farmers avoid costs from long-term grain storage. Additionally, by generating cash early, there is less need to borrow money for operating loans, thus reducing interest costs, he notes.

Why don’t more farmers take advantage of the seasonal rally?

However, Johnson admits that many farmers in Iowa and the Corn Belt do not take advantage of the seasonal price rally. “The rally is something many farmers could really benefit from almost every year, but not a lot of them do,” he says.

There are several reasons farmers cite for not taking advantage of this pricing opportunity. One is that the rally takes place at the same time as the busy planting season. Most of farmers’ attention during the spring is on getting the crop in the ground and off to a good start, not on marketing. Another reason few farmers fail to forward contract or price bushels ahead is a tendency to be bullish that the spring rally will last through the rest of the summer. “That bullish sentiment is persistent, even though evidence shows that late season rallies are rare,” says Johnson.

When will dry conditions from La Niña weather pattern kick in?

This year, Johnson says some farmers may be holding off selling because there are predictions that hot, dry conditions from a La Niña weather pattern will reduce yields and drive up prices late in the summer. However, most climatologists are predicting that a La Niña pattern, if it does occur this summer, will happen too late in the growing season to have a major effect on yields.

Some weather experts are now declaring that as of June 9, 2016 the El Niño weather pattern is dead, and that we are entering a neutral phase, and then a shift to a La Niña weather pattern will begin. Biggest question is the timing of when this shift from El Niño to La Niña actually takes place and when the hot, dry weather period begins. If it’s not until August, then we have a good chance of getting a good corn crop made in 2016. But if La Niña kicks in during early July and it turns hot and dry for the corn pollination period, then the yield potential will be hurt.

Farmers can consider using “put option” contracts

Farmers can avoid missing any upside in the market by buying “put option” contracts. “By paying a premium and buying puts, a farmer has the right, but not the obligation, to assume a particular short position in the futures market at a specified price, called the strike price. These put options act like an insurance policy to help keep you from missing a futures price rally,” Johnson explains.

Another reason farmers hesitate to sell into the spring rally and commit bushels to delivery is many farmers still struggle with the idea of selling bushels they haven’t yet harvested. “Farmers worry they may come up short at harvest and will have to pay a lot to make up for bushels they have sold but were unable to produce,” says Johnson.

That concern has been relieved somewhat by the popular Revenue Protection (RP) option in the federal crop insurance program. It provides a way for farmers to protect themselves financially against a severe crop loss due to either yield and/or price.

Use Revenue Protection crop insurance option to manage risk

The Revenue Protection option guarantees a farm’s actual production history, or APH, times the level of coverage that the farmer has elected, usually between 65% to 85%. The revenue price of these insurance-guaranteed bushels is determined by the higher of two prices: the average price for December corn or November soybean futures contracts in the months of either February or October.

“Thus, a farmer who comes up short of contracted bushels at harvest is still guaranteed a futures price for a specified number of bushels,” explains Johnson. “Through the Revenue Protection program, the ability to fulfill the forward contract obligation can be made. And that potential indemnity payment reflects any market rally late in the season, since it uses the futures price average in the month of October.”

The key to using Revenue Protection and forward selling is that if the harvest price increases (October average for those same futures contracts), the farmer receives a higher revenue guarantee, he notes. “That’s a real advantage if there’s a shortfall of contracted insurance bushels because that higher harvest price will be reflected in the final indemnity payment.”

For farm management information and analysis visit ISU's Ag Decision Maker site extension.iastate.edu/agdm; ISU Extension farm management specialist Steve Johnson's site is at extension.iastate.edu/polk/farm-management.

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