by Courtney Llewellyn
How do you predict markets? When do you sell your grains? A few years ago, it was a more straightforward process. Now… “We’ve been trying to apply a rational thought process to an irrational series of events,” said Ed Usset.
Usset is the grain marketing specialist in the Center for Farm Financial Management with the University of Minnesota, and he presented “Spring Training for Grain Marketers” at the 2022 Commodity Classic along with Matt Bennett, an Illinois farmer and grain marketing consultant with Channel Seed. Much like pitchers and catchers showing up to prepare for the baseball season, this year, farmers need to put in a little extra work when it comes to markets.
A lot of that preparation revolves around the situation in Ukraine. Usset, who is the grandchild of Ukrainian immigrants, noted that the country is only 30 years old, a part of the former USSR, and is rich with black-colored chernozem soil that contains a high percentage of humus, phosphoric acids, phosphorus and ammonia – “which makes Ukraine one of the most fertile places on Earth,” he said.
Usset noted that over the past 20 years, Russia and Ukraine wheat exports have eclipsed U.S. and Canada exports combined, with Russia being the number one wheat exporter in the world. Wheat is the number two feed grain in the world, right behind corn. With the unrest in Ukraine and Russia (and across the globe, generally), things have gone a bit wonky.
“We’re back to bidding off the July contract this time of year,” Usset said. “I’ve never seen the market skip the nearest contract [May] like this.” It is, however, similar to the market inverse of 2008 that he witnessed. Back then, things didn’t work out the way sellers and buyers thought they would. General Mills saw a $111 million hedging loss; ConAgra, a $33 million hedging loss.
As for first half of 2022 price prospects, Usset wrote in January, “To the producers who still have last year’s crop in storage, I say ‘past performance is no guarantee of future results.’ But the history is promising.” That said, cash prices are usually the lowest at harvest and highest in the spring, for both corn and soy.
Still, rolling the hedge can be dangerous, Usset warned. Instead, “price frequently and for smaller quantities,” he said. “Don’t look for that One Big Sale. We live in an uncertain world – don’t get carried away with future sales.”
Maximizing Profit During Volatile Markets
“We just raised a record crop, so we must be doing something right,” Bennett said to lead off his presentation. But there are issues producers need to consider for 2022: How much has my net income increased? With farm income rising, am I adjusting my lifestyle? Have I quantified my worst-case scenarios? And have I maintained my flexibility? If you know the answers to these questions, you’re in a good position.
Right now, producers are getting the benefit of a rally after a record crop, which Bennett said we’ve never seen before. “Money is flowing from equities to commodities. We haven’t seen that in a while either,” he added.
With corn, the U.S. is using more than we’re producing – and we need to find a better way to utilize our ethanol. The corn market is heavily balanced on what happens in South America going forward. Bennett said the weather forecast looks decent in Brazil, but La Niña and her hot, dry conditions hasn’t gone away yet. He also predicts China will be purchasing more corn.
“If you’re considering 2023 sales a year in advance, consider the ratio of fertilizer to the price of corn,” he cautioned. “If we see a price drop in fertilizer this year, it will be after spring usage is done.”
As for soybeans: USDA is currently rationing supplies. If sunflower oil crops don’t come out of Ukraine and Russia later this year, soybean oil suppliers could see issues. Again, likely due to weather, Brazil production is looking at a huge decline possibility for 2022.
As climate-smart proposals move forward, renewable diesel, made from soybean oil, is going to have a huge impact. “We’ll be having a very different discussion in one or two years” regarding renewable diesel, Bennett said. We’ve been crushing beans for meal, but more will be going to oil.
Ultimately, “We have to be very cautious this year,” Bennett said. “We’re taking a big risk putting a very expensive crop in the ground.”
In conclusion, he stated 2022 could be “explosive” but profit margins currently necessitate action. Producers need to lock in as much profit as possible but leave room for upside movement. And “a person can’t go broke making a profit.”