Three Months Ahead
The two biggest factors to contend with are: extreme of market uncertainty and the fact that the market is already at record highs. This is the ultimate market risk.
We need to look no further than the lumber market to illustrate this point. In January lumber futures were about 1065 and on August 1 it was about 559. This is the reality of the commodity markets. Everyone must pay attention to this fact. Obviously, the grain markets are a different beast yet the potential for them to drop to 2020 levels is always present.
The easiest and most effective way to manage this risk is by simple planning. All this really means is planning for the next 90 days, not when the banker calls. This one step will help reduce your market risk significantly. Once the product is sold the price is locked in. The market doesn’t matter as the product is sold and off the market.
Why This Matters
This matters to you because without an extended time horizon the potential to get caught in a negative situation increases. This is because these types of markets can easily move $100 per tonne in 3 days and they can stay low for weeks before rallying back up. During that time you may be forced to sell at a sub optimal level. This simple scenario has already played out this summer. For many farmers this situation could easily cost the farm $250,000. This is why we want to expand the time horizon of selling grain this year. This is by far the simplest and smartest thing you can do on your farm. Take a look at the bills and make sure sales are made in advance.
Bulls and Bears
It’s a little bit early to be making projections for the upcoming year as the North American harvest is far from complete. However, we can start to put the piece together.
Sentiment: Neutral. Should see opportunities at $20
Bullish: Average crop with extreme low ending stock. Vegoil demand is strong
Bearish: Size of crop will affect basis levels. Weakening global economy
Sentiment: Neutral to slightly bearish. Todays price ($7 FOB). Elevators have resumed export program. Don’t expect $9 fob prices anytime soon.
Bullish: Limited import of corn. Average crop size. Solid demand.
Bearish: Less aggressive export program. Domestic demand could suffer.
Sentiment: Moderately bullish as crop production is probably below trendline yields.
Bullish: Globally the wheat crop will not meet trendline yields of production.
Bearish: Canada will have an average wheat crop and expect basis levels to reflect size and quality. If Ukraine and Russia start exporting that is quite bearish.
The point of this chart is to visually demonstrate how volatile these commodity markets can be. Lumber has gone extreme highs and is now trying to find a new trading range. This can happen in the grains as well.
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