No one knows how the weather will turn out this year. But we do know based on pictures like this, taken on July 11th in IN of corn that is emerging to shin high will need miracle weather to make maturity. For more pictures go to our interactive map https://www.agmarket.net/act-dynamic-map/ . So how do end users and farmers manage risk in an environment where the risk and unknows of how this crop turns out are so great?
The risk of adding any kind of a contract and then having a crop fail or not make maturity could cause a fiscal risk that would be unbearable. This year of all years is very likely that any commercial contract will be held for delivery at the end of the year. Farmers just cannot afford another adverse financial decision. Furthermore, this is a supply shortage problem and will probably only have a temporary impact on the market. Everyone knows there will be wall to wall corn next year and with a protectionist US international trade policy, this will create a vacuum price decline once the market perceives the supply problem is resolved. If the farmer waits until he knows he has a crop to deliver , the market will have most likely already topped.
About the only way of producer can go about managing market risk this year would be to use contracts other than cash contracts. The main reason would be to avoid any type of delivery commitment period. This will avoid the possibility of having to deliver with no inventory to deliver. It would also eliminate being tide into one location when there could be cash bids from 30 miles away that are much better. There are already train loads of corn being booked from Iowa and Nebraska and going into Indianapolis in order to alleviate some of the shortage problems. These localized shortages will allow basis levels to be radically different just miles away. It will be important to be able to take advantage of these opportunities.
Simply buying a put , establishes a floor underneath the market period. Purchasing a 460 put for $0.21 would establish a minimum revenue value of $744 per acre for this farm. That would generate a nearly $58,000 profit regardless of where prices go. We are still having to test a price range all the way down to $3.30 and up to $6.00 to account for all the possibilities that the current outlook calls for. If the market were to move higher, the put would disappear, the grain would still be unpriced and be worth the higher market value. Thus if the market went to 5.50 this producer would have over $1,000,000 in gross revenue and $239,000 in profit that could be locked in.
We often find that many producers and customers that we work with are unwilling to purchase a put and spend $0.21 on 100% of their potential crop. So the following graph shows the consequences of not managing risk properly.
The exact same farm using the exact same strategy but only implementing 50% of potential production creates a risk management plan very different than the one described above. In this example the same farmer does not stabilized is revenue . The income per acre can fall from $754/a at $4.50 all the way down to $650/a at $3.30 which would equate to $114,000 loss to the farm. The upside gain by leaving all of those bushels open is $270,000 at $5.50, which is only $30,000 more if he had managed his risk more effectively. In essence he’s only gained $30,000 at a risk of losing $140,000.
Every farm is so different than the other that running an evaluation on strategy is very important. It will give you the confidence to lock in 100% of what you expect in production in order to eliminate the risk of loss. We plan on putting out a series of short articles like this to help you understand how to manage risk whether you are a farmer or an end user. Stay in touch.
Bill Biedermann
AgMarket.Net
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