I’m not going to ask you to name names, but do you know someone who should have sold more grain when the markets were decent last spring? Yes? Unfortunately, my wife does, too. By now we’ve all heard about #Seasonal price patterns, and how prices tend to peak during planting season, but why didn’t we pull the trigger? Circle all that apply:
A) Was too busy planting to think about marketing.
B) I didn’t know my cost of production, so I wasn’t sure about making sales.
C) A trucker told me they were really dry just east of here, and it was probably going to be a total loss.
D) Fibonacci told me not to.
E) Was waiting for the Trump Bump!
In my case I tend to screw it up by trying to predict a precise turning point or price, and I either turn out to be wrong, or I forget to do the easy part: just put in some strong but achievable targets.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”– Charlie Munger
So what is a “strong but achievable” target?
After last week’s stocks and acreage report, I’ve heard some grumbling that we “might as well cancel those targets, ’cause they ain’t gonna happen!!” I can understand why folks would feel that way. On Friday the market dropped 3.4%, the 5th worst drop on the March quarterly stocks report since 1987, and now the “bullish case” is much less obvious. However, it’s in precisely this sort of environment that YOU NEED TARGET ORDERS, because nobody believes the market can rally. If you don’t believe the market can rally, you won’t be ready to pull the trigger when it does.
The fact is, there is absolutely no correlation between large market losses like we experienced last Friday and the opportunities to achieve price targets over the next 90 days:
The dots on this chart show the maximum futures price gain achieved between the planting intentions report and the 4th of July as compared to how much price gained or lost on the date of the intentions report. If you count up the dots, there were only three crop years (1997-1999) that didn’t achieve at least a 3.8% futures price rally post-report. During those years the ending stocks to use ratio ranged from 15%-19%, and we were stuck in a multi-year bear market following the 95/96 rally. For those reasons I’m willing to ignore those years for now, and set my minimum target at a 3.8% gain, which (conveniently) works out to 3.99 CZ’19. If you don’t agree that corn can achieve at least a 3.8% gain, then you might as well just sell some today, then let 3.99 be your next target.
Of the 29 years that saw at least a 3.8% gain:
- Half did better than 8%, or 4.15
- One third achieved a 15% gain (4.42), and
- A bit more than 20% of the years achieved better than a 20% rally (4.65).
Based on that history, my initial list of CZ’19 futures targets will be: 3.99, 4.14, 4.39, and 4.49. Do I think they’ll all get hit? Probably not. After all, 50/50 odds stop at an 8% rally, or 4.15. However, while I don’t see any reason to put all my chips at that level because time is still in our favor, I do believe there ought to be “re-evaluation” and “expiration” dates on the strategy because there’s no reason (yet) to believe seasonal trends won’t apply again this year. I’m not going to completely rehash the concept of seasonal pricing, but if we look at what happened in the four years with the worst report-day losses, you can see what I mean:
While I don’t want to overplay the value of those years as analogs, I think the patterns in the chart are probably good enough to put some timing to my targets:
Step 1) Figure out how much you want to sell. My goal is to sell just up to my insured bushels pre-harvest if all my targets get filled. In this case I’ve already got some bushels obligated with existing sales, and some bushels will be priced using our Seasonal Averaging Contract. Therefore, I will divide the rest of my insured bushels by four targets, then round down to the nearest 1000 bushels.
Step 2) Call the elevator and enter the targets. At our elevator you can do either futures price targets or cash price targets. Assuming a -40 harvest basis, those four targets work out to: 3.99 futures/3.59 cash, 4.14 futures/3.74 cash, 4.39 futures/3.99 cash, and 4.49/4.09 cash. What if you don’t want harvest delivery? We can help you translate these into prices for other delivery periods, or you could set futures-only HTA targets, then plan to roll into later delivery periods.
Step 3) Set re-evaluation and expiration dates. Based on the “analogs” chart, I plan to re-evaluate my targets on April 20th and May 20th, and the final expiration of the strategy will be June 10th. So when we get to April 20th, if none of my targets have been hit, I will just sell some corn, then decide whether to change any of the targets. I will repeat that process again on May 20th. If I haven’t sold my “budgeted” pre-harvest sales by June 10th, it will be time to completely re-evaluate the strategy. If you prefer, you can set an expiration date with the elevator when you call in your targets, and they will call you when the target expires so you can make adjustments and put in new targets.
So there you have it – that’s my plan for the next 60 days! Is it the best plan? Probably not. But is it better than NO plan? We shall see… Happy hunting!