Posted on July, 31, 2024 at 08:41 am
Market bears seem to be around every corner right now. Weather is non-threatening, as the drought monitor map shows very little moisture stress through the heart of the Midwest. Weekly crop ratings are 13% higher at the good-to-excellent rating than last year in corn. Soybeans rating good-to-excellent are up 15%.
The funds recently set record short positions in corn (-353,983 contracts) and soybeans (-185,750 contracts). And as we close out July, many of the local elevators in Iowa, Illinois and Indiana have limited space for corn.
With all of this tough news, Dec 24 corn futures are down 60 cents, and Nov 24 soybeans futures dropped $1 since June 14. However, this isn’t the first time the market has fallen apart in July. We’ve seen this same story unfold several times over the past decade. It's just that when you couple these lower prices with our elevated cost of production, things become very challenging. According to the University of Illinois, this year is the second most expensive crop to produce (Corn: $1,175/ac and Soybeans: $871/ac), trailing only 2023.
Lower prices and higher costs are not a great combination. However, we can take steps to manage them.
Always try to raise more bushels. The more we raise, the lower our break-even price. We can’t control Mother Nature. However, we can control things like seed, fertilizer, chemicals and fungicide/insecticide applications. Focusing on the return on investment regarding crop management is more important now than ever.
Investigate ways to cut spending. In the last five years, equipment costs have risen exponentially. Positive returns, though, have allowed farmers to continue improving their lineups.
Focus on our marketing. When returns are robust, picking up that last nickel is not as critical. But right now, we can’t afford to miss an opportunity. We have to stay aggressive with our decisions and be willing to study new ways of hedging our risk.
Personally, I’m skeptical about USDA’s 181 bushels-per-acre national average. But year after year, we keep raising the bar on what is possible.
Because of this, most of us can maintain our existing equipment and delay that new purchase for a year or two. It feels like we are already seeing that happen. Since June 2023, tractor sales are down 12% and combine sales are 17% lower. With higher interest rates, farmers seem determined to lower their short-term debt.
Don’t be afraid to change! You may need to write a contract that you haven’t used for several years or deliver to a distant location so you can pick up another 3 or 4 cents per bushel. It just might mean listening to an advisor with an entirely different perspective.
With new-crop corn and soybeans trading near calendar year lows, you may think you missed the chance to prepare for harvest. But that couldn’t be further from the truth! How do we know this is the lowest price level for the year? What if instead of raising the trend yield of 181 bpa, our corn hits 184 or 185 bpa? If that happens – and if you have the right marketing plan in place – you might find yourself rooting for lower prices.
Let’s do a little math to demonstrate the point: $4.66 (2024 Crop Insurance Spring Price) at the 85% (Crop Insurance Level) equals a $3.96 Revenue Price Guarantee (with a higher APH).
Now, let’s say prices drop substantially, and the fall price of crop insurance is set at $3.50. Theoretically, if your crop comes in at the APH level, you would receive a revenue payment of 46 cents per bushel.
What would happen if you combined that with a $4.10 Dec 24 put option? That put option with a 20-cent cost (using the July 26 settlement price) equals a $3.90 floor price.