Spring is officially upon us, though you could argue that it has been here since Christmas!
I have seen equipment in the fields in Central Alberta since mid-March. Everyone wants to get the crop planted, but they realize the risks of seeding early. They may be out on the land more for their state of mind, in an effort to occupy their time until the season is right to plant.
The unseasonably warm and dry winter and spring are something we may need to be concerned about — some spring showers would be a welcomed blessing.
This brings to mind an old saying that you often hear repeated in the rural coffee shops at this time of year when we are faced with a dry spring season: Seed into the dust and your bins will bust!
While this is by no means a guarantee of certainty it did seem to prove out last year for many across the Prairies, but can or will it happen again?
Selling in a dry spring
A dry open spring can be a nightmare when it comes to marketing your grain. It provides hope (false or otherwise) that prices could go higher if the dry spring persists. The risk is that, if there happen to be good pricing opportunities in the springtime and farmers don’t take advantage of them because they see potential for higher prices due to drought, growers may miss out on locking in decent profits for the sake of false hopes.
This is why it is important to know your break even prices for the crops you grow when setting up your marketing plan. When you know this, you can stick to your plan and take opportunities to lock in profitable prices when they are available. You can be mindful of changing market conditions but not miss opportunities.
A spring weather market can provide some good pricing opportunities. The threat of lower production can push market prices higher and make grain companies narrow in their basis levels in an effort to get you to commit some of your tonnage to them.
When weather uncertainty grips the marketplace no one knows what may happen or what the end results will be. Buyers will make decisions based on what they need to cover their sales. They can’t afford to speculate or hold off buying even if they think the markets may go lower — they must buy continually to ensure they keep their sales needs met.
Grain companies will go on selling grain to their buyers, but with a perceived or potential production shortage they will no doubt raise their asking prices. They are taking on pricing risk until they are able to buy grain from producers to cover their sales commitments. In order to buy from farmers, grain companies may need to narrow their basis levels as an incentive to get farmers to commit stocks.
If the futures are moving higher and/or grain companies are offering attractive basis levels to entice deliveries, you need to consider these pricing opportunities. They may not last for long. Weather conditions should change, which could impact production potential and markets.
A dry spring in Western Canada or North America doesn’t necessarily mean that world stocks will be short or that world markets will go up, so one must be aware of all world market factors in order to make the best overall marketing decisions. Is this weather situation a localized event or is it a broader global event? If it persists will it impact local or world stock levels to any great extent? Could local or world market prices be influenced and pushed higher?
If you wait too long to price because you are trying to ride out the weather market rally and pick the top, instead of pricing at profitable levels, you are exposing yourself to a lot of additional market risk.
Pre-pricing at profitable levels when the opportunity is there and then using futures or options strategies to keep you in the markets for a potential rally is far less risky and a more disciplined approach to marketing. It should provide better results over the long term than trying to ride rallies and pick the top.
Disciplined marketing is about knowing your costs and break evens, understanding market dynamics and using that knowledge to consistently lock in profits. It’s about utilizing strategies that will help you extract extra value out of the markets when it makes sense as opposed to risking it all on a game of picking the top.
Be safe this spring season.