A lot of growers kicked themselves this winter as grain markets stagnated, leaving them holding more inventory than usual. Even those lucky enough to sell last summer’s brief rally did so at prices that were barely profitable.
But a few farmers laughed all the way to the bank, thanks to sales of 2015 crops made two or even three years ago. They used big rallies in the wake of the 2012 drought to lock in multiple years of profit.
This type of forward-thinking was fairly common until a decade ago. Selling one, two or even three crops at a time was not uncommon. But the practice fell out of favor during the extended grain market rallies from 2006 to 2008 and 2010 to 2013. Growers who held off on sales captured higher prices, especially if they avoided long-term commitments.
The cost of growing crops was just as volatile as the market. Making long-term sales was difficult because no one knew what their breakevens might be. Fertilizer and fuel were big unknowns. Cash rents also escalated, increasing uncertainty over whether a grower would even be able to hang on to ground if cutthroat competition emerged for the lease.
But that era was an anomaly, witnessing unprecedented demand growth from the ethanol boom and the surge in soybean purchases by China.
Major shifts in usage are rare. Sure, export demand can increase for a year if production in one of the other major growing regions suffers. But these gains normally don’t last because farmers around the world plant more to take advantage of the temporary price spike.
The only time the ground shifted under the export market for corn and wheat came during the historic opening of trade in the 1970s, highlighted by the so-called Great Russian Grain Robbery. Ironically, sales of the 2015 wheat crop are expected to fall to the lowest level since 1971, when that spurt was just getting started.
Corn exports held up a little better. But a big increase in production from the Black Sea region and South America means our share of the global corn trade has fallen by more than half from its peak in the 1970s, when almost 85% of exports came from the U.S.
China’s appetite for soybeans is still on the rise, though at a slower pace than before. Growers in Brazil keep on increasing acreage, nonetheless, spurred by prices inflated by their depressed currency.
Markets can still rally for multiple years without demand growth. But accomplishing such rallies now takes lower production, like the three below-average crops U.S. farmers harvested from 2010 to 2012.
A bust followed that boom, with three straight years of above-average yields. That streak could conclude in 2016 if El Niño’s warming of the equatorial Pacific ends as expected. And if La Niña’s cooling of those waters occurs, chances for a full-blown drought like 2012 increase as well.
This risk alone could help produce rallies for selling this summer that lift prices for 2017 crops to profitable levels.
Selling next year’s crops aggressively this summer is hard if a La Niña pattern doesn’t develop. Most times a strong El Niño, as in 2015, is eventually followed by La Niña. But the cooling can take several years to impact weather for the U.S. growing season. So, if you do plan to make multiple years of sales in 2016, be sure to have a strategy for covering those contracts. The purchase of call options may be necessary for those who want to capture the benefits of a big rally in 2017.
Otherwise, be prepared to live with your price, planning to use that weather rally next year to sell crops
for 2018 and beyond.
Long-term thinking like this isn’t easy. And forward sales using cash contracts normally are done with
basis that isn’t favorable. Hedge-to-arrive contracts
will incur additional fees, some of them steep to cover the buyer’s risk of margin calls. That risk keeps most growers from using futures directly, unless they have very deep pockets and can handle the cash flow required to stick with hedges. FF
- Knorr is senior grain market analyst for Farm Futures.
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