Posted on May, 8, 2024 at 09:08 am
Suppose you are a producer, an end user, or simply a speculator trying to navigate the commodity markets in what is turning out to be a less-than-predictable 2024. In that case, you will need to be flexible.
The way I see it, the next handful of months will present both considerable risk and potentially tremendous opportunity for those who farm for a living or at least want to profit from being positioned the right way as prices are discovered as the season moves forward.
Will 2024 resemble 2012, when the markets bottomed out in May before going parabolic vertical for the rest of that drought summer? Or will we take on some of the traits of 2014, when we topped out in early May – similar to the last few days – only to stall and drift much lower for the next 5-6 months?
After 30 years as a broker, following commodity prices through every price scenario, I try my best not to make promises. It makes me uneasy when I see brokers step out and, for a fee, are willing to speculate with your bottom line. I spend much of my time teaching producers to protect prices with puts since puts can provide a safety net for you from the threat of lower futures prices and, at the same time, leave your ultimate cash sale fully open to higher futures prices.
Everyone would like for summer 2024 to see 2012 price action. However, a repeat of 2014 benefits bears and end users but not the rest of us. That’s why we hedge. We know we have risk, and we shouldn’t believe anyone’s promises.
Everyone out there is in a unique situation. Only you know where you are most vulnerable.
After too many months of uncomfortably low and tedious price action, the markets are in a nice uptrend. Use this rally to move old crop bushels from the bins if you need to sell grain for cash flow. Wouldn’t you rather get the physical moving into a 60-plus cent up move in corn instead of dumping into new lows as we saw in March?
Think about that; if you are fortunate enough to have refrained from selling until now, you’ve picked up an additional $3,000 for every 5,000 bushels sitting unpriced on your farm. If that’s you, go get paid!
Same thing with your spot beans. We were just handed 74 cents in three sessions! That’s $3,700 for every 5,000-bushel load.
I’m often asked: “Tom, when will this hedging thing finally make me some big money?” And my answer is always, “Your real money is and always will be in your bin!” But if you don’t take action and sell it –
or at the very least spend some money on a protective put to provide a floor for yourself – then you will squander that real money just as if you left the porch door open and watched it blow out on the wind of an approaching spring thunderstorm.
Now you’ve made a cash sale, and maybe you’re feeling a twinge of FOMO, or fear of missing out. Keep an extra dime on hand to buy a cheap call option (its price increases when the futures move higher) and stay long on paper for half, or all, of your recently sold bushels through June and July.
Call strategies have a lot of nicknames, such as “courage calls” and “naked calls” or, as my friend Chris says, “conscience” calls. Let’s call these re-owned calls after a cash sale. They will go a long way to ease your worried mind right after you’ve hit the sell button and have a 2012 premonition.
If we buy the calls, will futures blow up? If they do, the calls will make more money. And if we buy the calls and futures slide lower for the next 5 months, you will have made a good cash sale. Make the cash sale you need, and then watch the market. Find someone who can keep you updated on technical levels in the market.
Money flow and technicals have been like Batman and Robin lately, working together to drive this recovery north. And make no mistake: they matter – even if no one can tell you exactly why. They attract buyers and sellers and are road markers on the way up and down. Fade them or follow, but don’t ignore them.
Be flexible. Be smart. Don’t sit and do nothing. How will flooding in Brazil impact markets? Funds are still short. Will Friday’s USDA report be bullish? Crude oil is moving lower, and the gorilla (2 bbu carryout) is still on the market’s back. What about China’s demand-disappearing-act? All these factors beckon the market in different directions.
Source: Farm Progress