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Grain merchandising and uncertain markets

When dealing in the commodity markets, volatility is your friend. This observation was among the nuggets that Jeffrey Hainline, chairman of Advanced Trading Inc., and Jeremy Strubhar, Ag Risk advisor at Advanced Trading Inc., shared during their presentations at the November 13 Chicago Farmers’ meeting.

Advanced Trading (ATI), based in Bloomington, Illinois, is a commodity trading company. It offers consulting services to people in agriculture on how to manage their enterprises, related Jeff. Additionally, ATI provides assistance for logistics, strategic planning, marketing, and research. Proprietary software and solutions to help manage commodity risks also are available through ATI. It has national and international clients.

Some things to know in managing your commodities:

• Jeff noted that in 2017 there have been very narrow price ranges in corn and soybeans with little movement. “Without much movement, grain companies suffer. Lack of  movement means lack of opportunity,” said Jeff.
• He said that 2017 has the second highest corn stocks/use ratio since 2000. Jeff went on to say that 87 percent of corn is used domestically and the use is growing slowly by about two percent a year. Feed and industrial uses of corn respond to the size of the crop.
• Jeff related that ethanol use is growing and ramping up. As a result, there will be a need for more corn. Currently, China only uses a two percent ethanol blend with gasoline. If they expand their ethanol use, there would be a dramatic increase in fuel and ethanol demand. The same situation exists in India. Brazil is a major ethanol producer, but its ethanol is made from sugar. The United States exports corn in the form of ethanol to Brazil. He said that the United States has lost the China market because it has a stockpile of corn. However, we have picked up Mexico and Turkey.
• Ethanol companies continue to be profitable.
• Logistics is an important consideration with stockpiles of corn. Last year’s record corn crop forced many ground piles. When there is a significant amount of corn that needs to be stored and there is no place to put it, the price goes down.
• The forecast for this year is that there will be deficit space by 250 million bushels.
• At one point, the United States had 74 percent of the corn market; however, exports stayed stagnant and now the United States has 34 percent of the market.
• Regarding soybeans, it is estimated that China will import 97 million tons of beans this year. This is due to the increase in feed needed for animals because Chinese are eating more meat. South Africa, Asia, and the Middle East bean markets also are growing because they are buying more meat.
• There is a meteoric growth in the demand for soybeans because it has become food for animals.
• There is an incentive for farmers to plant more beans and sell them; not so for corn.
• There is a record short position for managed money in corn.

Jeremy discussed what the farmer can do to better manage the grain market. He noted that 2.4 billion bushels of corn were carried over from 2016-2017 and” the farmers owned it,” which resulted in a lot of storage costs.

“You want to be hedgers,” said Jeremy. “Lock in prices. Be aware of what will hurt your operation, such as lower prices. Things outside of our control can lead to lower prices, such as political unrest and natural disasters.”

Jeremy observed that the American farmer has become an expert in managing risks in growing the crop, much of which has improved due to technology. However, managing price risk still suffers.

The tools that help manage prices are:

• Put options, which give the farmer the right to sell unsold bushels; puts gain in value as the price drops.
• Call options, which give the farmer the right to buy. It is used to replace ownership after selling bushels; calls gain in value as the market goes higher.
• “A put is used to protect yourself against lower prices,” said Jeremy. “With a call, if prices go higher, you benefit. A call option is a way to replace grain once you sell it. It is often cheaper to own grain in a call option than to store the grain in a commercial grain elevator.”
• He pointed out that options work best when there is volatility.
• Puts:
• Lock in a floor and give you a minimum price
• Extend cash pricing window
• Allow you to partake in higher cash prices, or increase floor
• Make the risk know
• Insulate you from a price drop, protect your financial balance sheet
• Calls:
• Gain if futures prices rally
• Risk is known
• Remove fear of selling too early and too low
• Make cash sales with confidence
• May be cheaper than paying for commercial storage

In response to a question, Jeremy said that 5,000 bushels is the minimum amount of bushels for option strategies.

Jeremy said, “My recommendation is to have a basic risk management plan based on protecting prices, not speculation.”