If you’re the type of producer who likes to watch the markets, your head is probably spinning with the volatility we’re seeing right now. Prices can go up, down and sideways between February and June, and there’s no guarantee that the trends we saw last spring will return this year.
Carryover causes variability
In years of plentiful supply, where there is lots of carryover from the previous crop year, the market fluctuates very little because it is insulated from the odd production issue. On the other hand, if supplies are tight with little carryover, the market may overreact to any production concern or rise in demand.
While prices can change a lot from year to year, fortunately, there’s almost always an opportunity to sell grain at solidly profitable levels. By looking at historical market data, we can see distinct price trends and identify this opportunity.
Hindsight shows distinct price trends
The last 10 years have shown us that futures prices typically rise as U.S. planting approaches, and they continue at these higher levels until late June and early July. Throughout the winter, the market doesn’t know how many acres farmers will plant and certainly doesn’t know what kind of growing conditions might exist three or five months later. Because of this uncertainty, the market places a premium on prices – the “risk premium.” Once the market is comfortable that a normal (or better) crop will be produced, prices fall precipitously – often 10% or more.
Farmers should focus on the February through June timeframe as it historically delivers the seasonally high futures prices.
Make a plan before seeding
Come May and June, most folks have closed the book on grain marketing because they are in full seeding mode. If you want to capitalize on the risk premium, you need to have a plan in place beforehand.
On my farm in Elm Creek, Manitoba, my husband and I forward contract 10% of our new crop wheat in an averaging contract like PaceSetter. Once the seed is in the ground and we’re feeling a little more confident that we’ll have a crop, we like to move up to 20% sold.
Instead of doing an additional 10% in Futures First, we’ll open a Price Protector Put contract. It lets us set a basis contract and a futures floor price, but we can stay in the market to benefit from a futures rally. That way, if we don’t have the crop or if prices go up, we are covered.
Not every farmer is comfortable forward contracting grain, but if you can get in the market with the right contract right now, there are some great opportunities to sell at a premium price.
Talk to your Cargill representative, visit your local Cargill retail location or call 1-888-855-8558 to see how you can get in the market to take advantage of risk premiums.