6 Cover story Risky business WHEN TO LOCK IN? Steve Kell THE PERIOD BETWEEN 2021 AND 2023 MIGHT GO DOWN IN HISTORY AS SOMETHING OF A DARK PERIOD in the business of grain farming. But not because of the prices. Cash grain prices enjoyed record highs between a drought in North America, two consecutive droughts in South America, and a war breaking out when Russia invaded Ukraine. The dark spot is that those really hot markets taught us some bad habits about marketing and allowed us to slide away from the tools and discipline which had made us successful in the years before. When the world market believes it is short of grain, it behaves a lot like a motorist who believes that they are about to run out of gas. They find the nearest place to get some and pay whatever the price is because the fear of running out is overwhelming. That’s essentially where the world grain markets were between 2021 and 2023 when there were legitimate concerns about grain supply and potential interruptions to the market. End users around the world wanted to own their supply needs, and commercial grain companies wanted to own inventory because it was a good investment. Like the motorist running out of fuel, we had a very motivated market with enthusiastic buyers whose principal motivation was simply not to run out. The grain business has changed a lot since then. We have enjoyed two near-record North American harvests, and South America has had one massive crop and may be on its way to a second. The net result of these great production numbers is that ending stocks have become burdensomely large. Going back to our motorist analogy, if you’re going to be able to do all of the running around that you need to do and still get home with a quarter tank of gas, how cheap would it need to be before you chose to pull up to the pumps and fill up? A ’CARRY’ MARKET In these times when commodities are well supplied relative to demand, the futures markets shift into what is known as a “carry,” meaning that supplies are large enough that the market will pay holders to carry the inventory forward. It is the historically normal situation for the grain markets. Statistically, five of every six years is a carry market in the corn futures, so we’ve all had plenty of practice operating in this scenario. In a futures “carry,” the nearby contract is the lowest price, and the values rise as the market moves out into the forward months. In the corn futures, we might see the carry present itself like this: December $4.00. March $4.15. May $4.25. July $4.37. There’s a tendency to think that this shows strength in the markets because the crop is worth more later, but the truth is actually the opposite. In a carry market, the nearby prices are always the lowest because there is a discount if you need the money or the movement now. The big strategic shift that farmers need to make when we find ourselves in a period of surplus grain supplies is to plan out our marketing in such a way that we don’t get trapped into ever having to accept the spot cash prices. WHEN TO FORWARD CONTRACT? The optimal time window for forward contracting grain is six to 12 months before the actual delivery window when the crop is going to move to market. Working inside of that particular time period creates an opportunity to lock in the higher futures prices in the deferred futures, but also is STEVE KELL AT HIS FARM IN SIMCOE COUNTY.
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