Selling spring and summer price rallies
Futures price volatility is a friend of row crop farmers. Higher price volatility during the spring months leading to higher futures prices can be expected nearly every year. That’s because weather uncertainty in the Northern Hemisphere influences futures prices where the majority of global feed grain and oilseed crops are grown. Futures prices tend to become more volatile than those witnessed during winter months.
In most years, farmers should consider using this price volatility during spring to finish marketing most of their old crop bushels. By April and May, expect attractive basis levels especially for corn as processors bid to gain access to stored bushels. Making sales by mid- June can also help avoid the risk of storing multiple years of crops that could lead to constraints on cash flow and working capital.
Use this same spring timeframe to sell a portion of your new crop corn and soybeans. This can generate cash for the fall and winter months and avoid long-term storage and interest costs. Year in and year out, these marketing strategies will pay off as higher seasonal futures prices tend to favor the spring months. However, there’s no guarantee that these price highs always occur in this same timeframe.
A rally in the new crop December corn futures price happens nearly every year by April or May. The December futures contract tends to move higher from its winter doldrums. Prices remain relatively high until at least mid-June when more is known about the planted acreage and yield prospects. New crop November soybean prices also tend to rally during the spring and sometimes lasts into the summer months. These higher new crop futures prices are referred to as the Seasonals.
The December corn futures (Figure 1) and November soybean futures price charts (Figure 2) featured are for the period 1990-2015 and were created by Ed Usset, grain marketing specialist with the University of Minnesota. Prices are indexed annually with the January 1 price equal to 100. He then records the weekly futures price closes for the calendar year as a line graph beginning in January and ending 12 months later. By indexing the futures prices annually on January 1, he reduces reflecting the price extremes realized in years with weather problems like 1993, 1995, 2010, 2011, and 2012.
Note that over this 26-year period, both December corn and November soybean futures prices tend to rally by the late winter months. Prices remain relatively high into the late spring or early summer months.
The decision to take Revenue Protection (RP) crop insurance in 2016 now provides the ability to pre-harvest sell for delivery a portion of your guaranteed new crop corn and/or soybean bushels.
Selling these insurance bushels between March and early July is often complimented by the seasonal futures highs. A goal in 2016 might be to sell some of these guaranteed bushels when futures prices are above the crop insurance projected prices, which are $3.86 per bushel for corn and $8.85 per bushel for soybeans, respectively.
Choosing the right marketing tool
New crop sales can be made using forward cash or hedge-to-arrive (HTA) contracts. These marketing tools work well with RP crop insurance which guarantees revenue reflecting both bushels and futures prices. Both contracts require the delivery of a specific quality and quantity of bushels in a designated time frame. The forward cash contract fixes both the futures price and the basis when the contract is initiated, thus the cash price for delivered bushels is known. The HTA contract leaves the basis open, and fixes only the futures price. If a farmer thinks that the basis might improve prior to delivery of those bushels, then an HTA contract is preferred.
Keep these key points in mind:
- Consider the importance of seasonal futures price trends in making old and new crop marketing decisions.
- Futures prices tend to move higher in spring months with the uncertainty of the northern hemisphere crop supply.
- By the mid-summer time frame, futures prices typically have peaked and tend to reach their lows for the year around harvest. This combines with the typical wide harvest basis to create what is often called the “harvest low.”
Steven D. Johnson, farm and ag business management specialist, 515-957-5790, email@example.com