Looking back over the last six months, how did you do from a marketing perspective?
The fastest way to assess this is to look at a couple of commodity price charts.
You can find these charts and more online for free at tradingcharts.com.
First, let’s look at May Minneapolis wheat futures (see chart at top). The chart shows a pretty steady downward trend from October ($5.65/bu.) until the end of February ($4.85/bu.) where it seems like it has possibly found a bottom and is trying to work its way back up slowly.
My questions are: What was happening back in October that pushed the futures lower? Did you react accordingly at that time and sell some grain?
Heading into the summer of 2015, world wheat stocks were near historically high levels. Moisture across the Prairies had been sparse over the summer so yields weren’t expected to be stellar. The harvest in Western Canada was just underway and then we had some rain delays. When harvest commenced it soon became obvious that yields were going to be better than first thought. In October/November the U.S. winter wheat harvest produced decent yields as well and the spring wheat crop looked good so futures started to fall on oversupply pressures.
The Canadian dollar
In Canada our dollar (see chart below) was heading into a free fall from $0.78 in October down to $0.69 by January. This fall in the dollar translated into some very favourable basis levels for wheat at local elevators. Grain companies were including their currency conversion in the basis; as the dollar kept falling the basis kept getting better. I believe that these historical basis prices may have distracted some producers from the reality that the futures were in a major downward trend, but they didn’t pay enough attention to the futures charts.
Many decided to wait and see how high the basis would go before deciding to price their commodities. The big problem is the Canadian dollar and U.S. wheat futures have very little in correlation with one another — these commodities are influenced by different forces.
Since January we’ve seen a rebound in the dollar back up to the $0.76 range while wheat futures have continued to slide lower. Now we are seeing the great basis levels disappear as the dollar climbs high and wheat futures are still falling. Producers who didn’t price earlier are being hit with a double whammy of low futures and widening basis levels.
In the past couple of weeks, reports of seeding delays, floods and winter kill in wheat crops in other parts of the world have grabbed the market’s attention. Wheat futures seem to have found some life once again, but for how long? Is this just short-term market noise or will it turn into a rebound trend?
If you know your cost of production and break even numbers and have a marketing plan in place, when prices are profitable — as they were back in October/November — you should price a good portion of your wheat based on current market intelligence and dynamics. You could have locked in the futures only, if you felt the basis was going to continue to improve, but no one knew how low oil or the dollar were going to go so again it would have been a gamble. However, if you had at least locked in the futures, you would have protected that portion of your price from the downtrend that happened as was expected based on supply/demand fundamentals.
Soybeans and canola futures tell different stories to start, but there is still a very predictable outcome that could be expected if you watched the futures and the Canadian dollar. The only mystery was when would the dollar stop going lower and start to rebound? And, how fast would it rebound?
Early in October soybean futures hit a high and started on a typical three-step downtrend that continued until the end of November (see chart below). This downtrend was followed by a rebound inspired by potential South American production concerns. These problems didn’t materialize so soybean futures fell lower and then traded in a sideways pattern until March.
From October to mid-January, canola futures held to a sideways to slightly upward trend (see chart below). This was due mainly to the falling dollar, which helped keep canola values strong compared to soybeans. When the Canadian dollar found bottom and proceeded to jump back up fairly quickly, it caused canola futures to take a fairly dramatic drop of over $50/tonne ($1.13/bushel) in less than two months.
Back in October/November we knew that the soybean crop and canola production was better than expected so hoping for prices to go much higher wasn’t what I would call a very good bet. So again, why not price a good portion of your production at prices that were above $11/bu. at the time? Especially when yields were above average? You would be making very good profits per acre at those prices.
Market noise can be an easy distraction that can keep you from making sound marketing decisions based on profitability on your farm. Hoping for the “what if” scenario and then missing the opportunity to lock in profits can be a costly mistake.
Take profits when you can. If you want to play the markets, use paper to take a position with futures or options contracts. That way you won’t miss locking in a profit, or the potential for further gains in the futures. You get to deliver your grain and get the cash to pay the bills.