2021 Pre-Harvest Grain Marketing Perspective

Just because it’s raining doesn’t mean you’ll crash. Just because it’s sunny doesn’t mean you won’t.

I don’t know the exact mile market I might crash my car, but I know the conditions that favor an accident.

I don’t believe anyone can predict the future; I do believe I can tell you the weather.

This, and this alone, is what risk-on/risk-off is all about.

Few understand this.

Michael A. Gayed @leadlagreport

The next 60 days may be the most important two months for your crop marketing plan over the next year.  During the next two months, the market will resolve the >$1 difference between old- and new-crop prices, and USDA will put a firm estimate on yields, which will most likely set the tone of the markets the next 12 months.  I will try to say this carefully: the next two months will probably offer the most profitable opportunities for you to sell corn or soybeans between now and Christmas. 

Everyone remembers what happened last year: grain prices bottomed in August, just before a flash-drought and derecho tore through the heart of Iowa, and by October cash prices had increased by dollar­s.  While it certainly could happen again, it is very rare: only twice since 1960 have there been back-to-back years when OCT/NOV/DEC corn prices much exceeded prices available during JUL/AUG/SEP.  In years of tight supplies, I consider the time period between late-July and Labor Day to be the graveyard for old bull markets.

In years of excess supply, i.e. stocks/use > 15%, the good prices are typically gone after mid-May.  Mr. Market just needs to see that most of the acreage was planted, and the weather forecast isn’t more threatening than usual before flushing prices lower. In years of “normal” supply (15% > Stocks/Use > 11%), that date shifts to mid-June. Mr. Market wants to see emergence and verify acreage, and a long-range weather forecast through pollination. 

In years like this year, opportunities for high prices (and volatility) will usually persist as late as Labor Day.  This is because the market requires more evidence of how large the new crop will be before removing growing season risk premium.  Mr. Market wants to count kernels! This year, grain prices shot up so high in early-May that we probably won’t see even higher prices before harvest this year.  However, very profitable prices are still available, especially considering our local yield prospects. 

Based on my own comparisons with similar previous years, I encourage you to have all of your pre-harvest grain marketing wrapped up before Labor Day.  The next two charts show the median evolution of prices between July 15th and harvest for corn and soybeans. The charts were made by sorting all of the futures contract prices over the previous 30 years into equal groups of 10 years according to final stocks/use ratio: i.e. surplus, normal, and tight stocks.

You can see from the first two charts that, in years of tight stocks, the median tendency of both corn and soybean prices is increase from late-July toward a price peak just ahead of Labor Day. While the effect is more pronounced in soybeans, both commodities tend to see price declines after Labor Day until reaching a harvest bottom in early-October. I imagine it’s because folks take road trips during Labor Day, and everyone says “dang, the corn looks way better than I expected!”…then trades accordingly beginning the next Tuesday.

I know what you’re saying… “OK; since we’re in a ‘tight stocks year’, I’m just going to sell all the grains on the Friday before Labor Day, then head to the lake!” That’s the problem with statistics. Just because the MEDIAN price change is positive between July 15th and Labor Day, doesn’t mean it’s going to work every year: half of the years will be worse, and half of the years will be better. The next two charts attempt to illustrate this point by showing the median price change curves for tight stocks years (again), but this time including lines showing the best- and worst-case price change lines over the 10 years.

I think it’s pretty neat that both the corn and soybean charts show the same basic trajectory in tight years; in both commodities, there is noteworthy risk of lower prices in late-July, but the risk of accelerating price declines grows substantially after Labor Day. In the case of soybeans, out of the 10 “tight stocks” years, one of the years had already seen a price decline of $2.00 since July 15th by the time the “Labor Day High” was observed. Don’t pass up good prices in mid-July without getting a portion of your production sold, and/or setting a price floor.

  • If you haven’t sold much of your new-crop corn or soybeans, consider making some sales right now.  As I am writing this letter, prices are at levels where I have been happy to start contracting some of my own new-crop production. 
  • If you’re not ready to sell more at today’s values, but have a price in mind, consider putting in a target order for your next sale.  Target orders are always free, they watch the market 17.5 hours per day without blinking, and they are the number one most effective tool for following through on a marketing plan.
  • If you know how much you want to sell, and by what date you want it to be sold, but don’t know what to do about the price, consider using an averaging contract.  Cogdill Farm Supply is now offering a “Mini-Max Averaging” contract, which replaces our seasonal averaging program.  As the name implies, the contract allows you to price a small portion of your corn or soybeans every day during your chosen time period, but with the option of having a floor price locked. 

Maybe it’s just because they’re new to me, but I’m very intrigued by the prospects for using a Mini-Max Averaging contract for late-season marketing this year. Running an averaging contract should improve upon mid-July prices in most years, but there were many years when both corn and soybean prices dropped substantially in late-summer, which could drag contract prices down below profitable levels. Averaging contracts really aren’t that much fun when the market just goes straight down! However, by adding a floor price to the contract you can ensure your final price will remain in an acceptable range; adding a ceiling price reduces the premium cost for the price floor protection. The next chart illustrates this concept using a -10/+100 MiniMax contract (i.e. 10-cent floor, 100-cent ceiling).

The (above) chart includes three example projected prices series made by simply adding the MIN, MEDIAN, and MAX price change curves to the DEC’21 corn price chart on July 15th. Each of the three price scenarios demonstrates the rolling calculation of either a straight averaging contract (i.e. no floor or ceiling), compared to a MiniMax Averaging contract. In the median case, the MiniMax price curve is essentially the same as the straight averaging contract, but slightly lower to reflect the cost of the floor protection. In the “worst case scenario” (i.e. MIN price change curve), the straight averaging contract ultimately generates a price around $4.80, while the MiniMax final price is near $5.40. In the “best case scenario”, the straight averaging and MiniMax curves parallel each other until the underlying futures price gain exceeds the $1.00 ceiling, at which point the MiniMax price curve rises more slowly (i.e. since averaging is capped at a $1.00 gain).

As of July 19th @ 11 pm, a -10/+85 MiniMax Averager that would run until September 15th would cost about 15 cents. With DEC’21 corn at $5.60, the effective contract floor price would be $5.35, with a ceiling price of $6.30. In my case, I have two more target orders working in the market at prices just over current prices. Unless conditions change drastically, I will allow those targets to “ride” until early-August, at which point I will replace them with one or more MiniMax Averaging contracts if the bushels aren’t already sold, or if my yield estimate has increased.

Please give me a call if you are interested in the Mini-Max Averaging contract, or if you just want to discuss your marketing plans. 

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