Worried About Being Wrong?

One marketing newsletter recently quoted a market observer as saying, "The 'job' of the market is to make as many losers as it can!" This is much like another market adage that says, "The market is always right and the majority are usually wrong." If commodity markets preformed as the majority expected, marketing would be easy. But most everyone understands that this is not the case. Marketing is difficult. Markets often do not perform as expected and sales that were made based on these expectations become disappointing. However, successful marketing is not necessarily being right by selling at the highest prices, which is nearly impossible to do anyway. Successful marketing is avoiding price lows and capturing profitable pricing opportunities.

Throughout the winter and spring months corn, soybean and wheat markets have offered historically high prices, providing several profitable pricing opportunities. These same markets also have produced more than their share of disappointment, risk and uncertainty. The corn futures market moved above $4.00 per bushel in February and then declined more than eighty cents. In spite of record supplies, soybean futures prices headed toward $8.00 per bushel in February before declining nearly ninety cents. Wheat futures prices remained volatile throughout the winter and spring with a price range of more than $1.00 per bushel. Now, after first being led by soybeans (the crop with apparently the weakest supply/demand factors), all three markets are back in uptrends. Soybean prices began running up in early May (the time period during which a seasonal decline often begins) and have reached new contract highs well above $8.00. Tight world supplies and weather problems have turned wheat prices into a sharp uptrend that is approaching $6.00 per bushel. This is occurring at a time when prices normally decline due to harvest pressure. December corn futures prices have broken technical price resistance that had contained prices for more than two months and are once again above $4.00, coming within a dime of the contract highs. This is occurring with an expected huge corn planted acreage and high percentage of good to excellent crop ratings. The markets are again offering high selling price opportunities. But selling decisions are not easy. The markets are in uptrends. How much higher will they go? Wouldn't it be "wrong" to sell now if they continue to go higher?

Positive market factors can be negatives when it comes to making sales. Too dry in the eastern Corn Belt and too wet in the west are potential production worries that are among factors contributing to uptrending prices. "I should have made some sales, but I am just not comfortable selling something before I raise it," said one Missouri producer at a recent field day. This is a valid concern. Several wheat producers who had forward contracted wheat were forced to buy out or roll ahead their contracts when their wheat was destroyed by the "Easter freeze." Delayed planting, flooded out crops or rapidly drying soils add to production risk in many areas and are making new crop sales decisions more difficult. It is understandable that producers say, "What if I sell more than I produce, especially if prices go even higher and I have to buy out of the contract?"

Weak basis can turn high futures prices into disappointing cash prices. Strong corn demand has resulted in stronger cash bids for old crop corn in recent weeks as users attempt to attract corn deliveries from reluctant sellers holding corn. However, new crop corn and soybean bids along with wheat cash prices are evidence of weak basis across Missouri. New crop corn bids of forty cents or more under the December futures price are common in many parts of the state. New crop soybean bids of sixty to more than seventy cents under November futures price are occurring in central and eastern Missouri. Northwest Missouri soybean bids of eighty to more than ninety cents under November futures are common. Missouri cash wheat prices reflect basis of minus eighty cents or more. Wheat prices at some location more than one dollar under July futures contract prices. Isn't weak basis a market signal to not make sales?

Successful marketing requires focusing on market opportunities. Production is uncertain. Prices may go higher or lower. In spite of these negatives, there have been and may continue to be sales opportunities.

The USDA's current farm price range projections for 2007-08 crops are: corn from $3.10 to $3.70, soybean prices from $6.65 to $7.65 and wheat from $4.50 to $5.10. Although basis is weak, new crop cash corn bids across Missouri are in the upper one-half of the projected price range with many locations offering prices significantly higher than the upper end of the range. Nearly all of Missouri's new crop soybean cash bids, even with weak basis, are above the upper end of USDA's projected prices. There is considerable variation in Missouri wheat bids, but only a few are below the mid-point of the projected wheat price range. Most are in the upper one-half of the range and several locations have wheat bids that exceed USDA's projected prices. Following an uptrend until it is broken to make sales can be a strategy, but it requires close attention to the market and quick action once the sale signal is given. However, it is important to recognize that current bids are profitable prices. Make sure they are captured on a portion of the crop before a significant price decline occurs.

Production risk and price uncertainty are worries, but they should not get in the way of making profitable sales. Those with crop insurance have some protection if production falls short. Production and price risks are also reasons for spreading sales and maybe limiting pre-harvest sales to those quantities that are most likely to be produced. Although option premiums are expensive and using futures contracts adds the worries of maintaining account margins, these marketing tools do not carry the delivery obligations associated with cash contracts as futures/options can easily be liquated or offset without actually having to deliver grain. While production risk is a worry, there is also considerable lower price risk in not capturing some of the historically high prices when they are offered.

Current cash prices may be attractive, but they could be much better if it wasn't for the weak basis. Weak basis can possibly be avoided by using futures/options to make sales or forward contracting with hedge-to-arrive (no basis established) cash contracts. However, basis may not improve anytime soon. Large old crop supplies, along with anticipated large new crop corn production, are expected to stretch storage capabilities during harvest and limit any potential basis gains until well after harvest time. However, basis opportunities continue to emerge in spotty locations, depending upon user needs or lack of grain deliveries. Producers with storage facilities and semi-trucks can sometimes find alternative selling locations that offer significant returns within efficient hauling distances. For example, during the past week some scattered locations offered trucking returns of $3.50 to $4.00 per loaded mile for spot delivery of semi loads of corn, soybeans and wheat with hauls of less than 100 miles. Being prepared to take advantage of these opportunities when they are offered can add significantly to cash marketing returns.

Although determining how high prices may go or capturing the highest price is nearly impossible, there have been and will likely continue to be marketing opportunities. Successful marketing is not about being right or wrong. It is about accepting and managing risk along with capturing profitable pricing opportunities when they are offered. There are always risks of being "wrong" about prices or amount of production, but passing up historically high prices is nearly always a mistake.

Market Signals for Wheat Sell/Store Decisions

Wheat futures prices are at the highest price level since the run to record highs in 1996 and potentially the highest harvesttime prices ever! In spite of weak soft red winter (SRW) wheat basis, the very high futures prices are resulting in favorable cash prices. Should wheat be stored or sold at harvest? What signals are the markets offering?

Market carry is the price premium that distant month futures prices offer above the nearby futures month prices. This represents what the futures market offers for distant month delivery or storage returns until that delivery month. As of June 14, 2007, September Chicago Board of Trade (CBOT) SRW wheat futures offer a premium of sixteen cents, closing at $6.22 ½ compared to the July contract's $6.06 ½. Although this suggests some limited short term storage returns, the December ($6.21 ½) and March '08 ($6.21 ½) CBOT wheat futures prices offer no carry or storage returns beyond September.

The limited amount of market carry suggests that any longer term storage returns will need to come from higher futures price levels or basis improvement. Basis improvement (strengthening or narrowing of basis) will likely be limited due to competition for storage space from corn and soybeans as the fall harvest approaches. Higher futures price levels may be possible, but it is important to recognize that prices are already historically high and that storing is the same as speculating on higher futures prices.

Any wheat storage returns appear to depend upon short term storage to capture the September futures carry and/or significantly higher prices. Longer term storage (beyond September) returns appears to depend upon signifi- cant basis improvement as well as higher price levels. Storage returns may not be impossible, but they are certainly strategies that contain considerable price risk.