Grain Market Gleanings
Low Prices a Treatment, But Not Cure for Low Prices
“Low prices cure low prices” is an often-quoted market adage. This statement is
rooted in the theory that low prices tend to discourage production and encourage consumption, which leads to tighter supplies and higher prices.
However, Darrel Good, University of Illinois extension economist, says that low prices aren’t exactly a cure for low prices.
“Low prices encourage consumption, but they do not, of their own, increase demand,” he says.
In the past, there was often a supply response to low prices in the form of government acreage reduction programs. This government policy response has been eliminated from current legislation and low
prices have not caused producers to reduce planted acreage. “As long as supplies are large, prices will remain low to encourage consumption,” says Good.
Indeed, consumption and demand are often confused, but they are not the same. Consumption and price are components of demand. Only by increasing consumption at the same price is demand increased. Marketing
newsletters and analysts often refer to increased consumption or heavy use as increased demand—this is really not quite correct. It is just increased consumption and, without a real change in demand or reduced
production, won’t increase price.
There are positive benefits to increased consumption that could eventually lead to higher prices. When supplies are large, increased consumption uses them up. This prevents ending stocks from becoming even
more burdensome. It helps set the stage for supply and demand changes to increase price by not having a large leftover inventory. Then any reduced production or real increases in demand could quickly tighten up
supplies and lead to higher prices.
Grain consumption has been high. For example, USDA expects both new crop and soybean use (consumption) to increase to record levels in the next year. However, in spite of this record use, anticipated large
production will result in record supplies and ending stocks will increase.
The amount of ending stocks and the stocks to use ratios are the key factors to watch. They provide the best clues for price direction. Low prices may serve as a “treatment” by using up supplies. But,
without a reduction in supply or an increase in demand, low prices alone won’t “cure” low prices. – Melvin Brees, University of Missouri farm management specialist.
Strategies for Selling Northern-Grown Corn
In the last few years many crop producers have become corn farmers and although encouraged by
their yields, have been disappointed in strategies to sell this crop. With the help of the current farm program, our marketing groups have had success in selling their crop in the $2.30 to $2.40 price range for the
last three years. It starts after harvest with a CCC loan and good storage. We then look to the July 2002 futures or even the Dec 2002 for a price rally that will bring the July futures above $2.40 for July, and
then sell the corn on a hedge-to-arrive or sell the futures for July.
July 2002 futures in November was $2.33, 30 cents higher than the current Dec futures. Into next May, look for a narrow basis (40 cents or less) and lock that in for July or Aug delivery.
LDPs for corn have been normally very poor during harvest, but have been their best (the last three years) during the July/August months. Example: July futures $2.43 - $.40 basis = $2.03 + .30 LDP = $2.33,
plus no interest cost for the CCC loan. Try it on some of your corn, but remember the July futures have to be sold while there is still a good carry. – Mike Lockhart, farm business management instructor, Ulen, MN,
ph. 218-596-8500, email: firstname.lastname@example.org.
Avoid These Six Grain Marketing Mistakes
1. Producers who won’t sell when markets are going either up or down rapidly because they’re
too emotional. Producers are most comfortable selling when markets are stable, which is common to markets with relatively low prices. However, you can remedy this problem by placing scale-up or scale-down sell
orders with your grain buyers or commodity brokers.
2. Producers who are more worried about the market going up than they are about it going down. They will buy call options after they sell so they don’t miss the high. Instead, producers should focus on
buying put options to manage downside risk on unpriced grain.
3. Producers who don’t sell in a long enough marketing window. They tend to wait until after harvest and, in most cases, after January 1 before they begin selling. They try to finish before the new harvest
begins so they have room for the next crop, but this is only an eight-month marketing window. You need to work at selling increments before planting, after planting, after harvest, and during the spring and summer
storage season. Many times the best marketing opportunities are available before the crop is planted. Using a longer marketing window increases the chances of capturing good marketing opportunities.
4. Producers tend to sell when they need money. Too much of the crop is sold during the February-March time period, when markets are historically low and cash flow needs are large. Producers need to plan
ahead by selling in advance of this late winter period to provide for cash flow needs.
5. Producers tend to sell before harvest to make room for the new crop. Generally, in years of good crop prospects, the basis is widening and seasonal lows come at harvest. You need to provide for storage
space before this time period.
6. Producers don’t make storage pay because they don’t sell the “carry” in the market. In times of low prices, markets tend to have a “carry,” which means that price offerings for sales in the future
are higher than for the present time. Producers with on-farm storage can capture these premiums by forward contracting their unharvested crop for the following spring or summer delivery.
Grain marketing is a very challenging part of farming, but having a good marketing plan and avoiding some of these pitfalls can help.
– Robert Anderson, U of M extension farm management educator, email@example.com