What If I'm Wrong?

In January, 2005 with the prospect of burdensome domestic and world supplies, soybean prices below $5.00 seemed likely. At that time any price rallies into the upper $5.00 range seemed to be appropriate goals to begin making new crop (2005 production) sales with only an outside chance at prices approaching $6.00 with a rust scare. However, soybean prices quickly rallied above $6.00 in March, due primarily to production problems in Brazil. In spite of these production problems, record world carryover, and projected U.S. 2004-05 ending stocks in excess of 400 million bushels, suggested $6.00 plus soybean prices offered a rare opportunity for new crop sales. Looking back, many would probably view sales made at these levels as being "wrong."

Market volatility adds to the possibilities of being wrong. Dry weather (supported by worries about rust and aphids) sent soybean prices above $7.60 in June. Weather forecasts of possible rain then contributed to a sharp drop in prices of more than $1.00 to below $6.60 during the last week of June. Since then daily futures price ranges of more than 20 cents have been common and prices are back above $7.00. USDA also continues to increase 2005-06 soybean price projections. The current (July) estimated price range is $5.10 to $6.10, which represents a 40 cent increase in the last two months. Strong demand continues to chip away at old crop ending stocks, now projected at 290 million bushels, and 2005-06 ending soybean stocks are expected to be lower at 210 million bushels. Aphids have been noted in the northern Corn Belt, rust remains a concern, and the drought in Illinois may be spreading. Prices below $5.00 are still possible, but the chances for much higher prices may be increasing. $7.00 plus soybean prices at harvest time have only occurred in 3 out of 20 years and didn't seem possible a few months ago, but will it be "wrong" to sell at these prices now?

It's possible to be "wrong" about corn too. Increased acreage and burdensome supplies in excess of 2 billion bushels normally would point to sub $2.00 prices. USDA's current projection for 2005-06 is a range of $1.70 to $2.10, suggesting an average price near $1.90. However, dry weather and a surging soybean market contributed to a June rally in December corn futures prices to about $2.56. Prices then fell to near $2.30 and have since rallied again above $2.60. Corn is in the pollination stage and, if dry weather and high temperatures continue, additional yield losses and higher prices could occur. Although USDA expects lower prices, is it "wrong" to sell new crop corn at these prices when dry weather could send prices higher?

No one wants to sell too quickly if the drought continues to spread, production is uncertain, and prices are going higher. But volatile markets can be tricky and it's risky to pass up prices that are above USDA's projected price ranges. Some analysts have compared the current year's dry weather and market action with the drought year of 1988. Consider what happened in July of that year.

Severe drought had spread throughout the Corn Belt. Soybean prices had surged to almost $11.00 in June before slipping back below $9.00. The drought continued to wither crops and soybean prices were again moving rapidly higher in July. Soybean futures prices closed near $10.00 to end a week of volatile trading. The National Weather Service 6-10 forecast, released on Friday afternoon, called for more hot and dry weather. Nearly everyone believed that prices were going much higher and there was talk of "beans in the teens."

The following Monday morning, the weather forecast had changed somewhat. The market also had changed. The drought and short crops were "old" news that had been more than built into prices. Soybean futures traded limit down on Monday with continued sharp losses for the next two days. The drought wasn't over, but the bull market was. The market volatility, which had pushed prices near $10 on Friday, now quickly took these prices away and they wouldn't be offered again for nearly 16 years! So far, the drought this year is not as widespread as in 1988 and soybean prices were about $3.00 higher in 1988. However, this illustrates that it is easy to wait too long in a bull market and be "wrong" by not capturing good prices when they are offered.

Market planning and setting price goals are important to successful marketing, but even with the best market information available, market price expectations often are wrong. For this reason, marketing plans should always include flexibility or "what if I'm wrong" strategies in case the markets perform differently than expected.

Spread sales: Don't sell everything at once. The objective of spreading sales is to capture favorable prices on some of expected production. If prices go higher, additional sales can be made at higher prices. If prices go lower, at least some has been sold at favorable prices. While this strategy won't sell everything near the high, it insures that at least some is sold before any price decline occurs.

Price traps: Upside price goals are the key to many market plans, but having downside price goals or "price traps" can be important in volatile market conditions. These are price targets identified below current prices that can trigger sales if the market reverses before reaching higher price goals. The objective is to capture or "trap" a favorable price as the market starts to decline and before prices collapse. For example, the upside goal might be $8.00 for soybean sales, but having a "price trap" helps avoid missing out on $7.00 prices on the way down if $8.00 is never reached.

Cash contracts or futures hedges: How to sell in volatile markets can be a difficult decision. Forward cash contracts or harvest delivery contracts are the most common method of pre-harvest sales. However, cash contracts usually include a delivery obligation than can sometimes be a problem if production is reduced. An advantage of futures contracts is that they can be "offset" without having to actually deliver the grain. Cash contracts can be for almost any quantity. Futures contracts are for 5000 bushels, which may make spreading sales more difficult, especially for soybean sales. Another disadvantage of cash contracts is weak basis in new crop bids that may occur in volatile weather markets. Recently soybean and corn new crop bids at many Missouri locations reflected a basis that was 10 to 15 cents weaker than average. The major disadvantage of futures hedges is significant account margin requirements in volatile markets. Although cash contracts or futures hedges may be effective sales methods, the disadvantages have led many to look at using options as an alternative method of managing price risk.

Options as price insurance: Although options may seem confusing and many market advisors often recommend a variety of complex strategies, simply purchasing a put option can be compared to buying insurance. A put option provides insurance against lower prices. If prices collapse, gains on the put option offset price losses on unsold grain. If prices continue to increase, the option expires and the grain can be sold at higher prices. The disadvantage to options is the premium (cost) of the option, which during volatile markets can become expensive. However, the cost should be weighed against the potential for price decline. For example, current premiums for at-the-money soybean puts are 50 cents per bushel or more, but if soybean prices decline to the lower end of USDA's projected price range, the price decline could approach $2.00 or more.

Purchasing a call option can be used as insurance against missing higher prices when using cash sales or futures hedges. If prices continue higher, after cash sales are made or hedges put in place, gains on the call option would add to the net price on the contracted or hedged grain. If prices decline, the option expires and the grain has already been hedged or sold at favorable prices.

Marketing in volatile weather markets is difficult, but not impossible! It is usually only by "pure luck" that anyone sells at the market high. But planning for the unexpected and including "what if I'm wrong" strategies can help avoid missing out on higher prices when the market performs differently than expected.