Futures signal whether to sell or store | Farmers have more marketing control but many don’t understand what the markets are saying
Many farmers are discovering they don’t understand basic market signals now that the CWB monopoly is gone, says a risk management specialist.
Those signals should be central to any farmer’s marketing plans.
“It’s one issue we’ve really ignored,” said John DePape, whose firm Farmers Advanced Risk Management Co. focuses on crop sales sequencing that maximizes potential returns.
Many prairie market dynamics have been up-ended by the end of the monopoly, giving farmers much more control of their marketing choices.
However, that means farmers are now dealing with issues they have often ignored.
Farmers often used canola sales as their best option for quick cash at harvest time when the CWB controlled much of the wheat, barley and durum pricing and delivery.
Canola was the main futures-priced crop, which could be easily priced and moved soon after harvest, while board grains were harder to price and move quickly.
Once immediate cash needs had been met and the fall bills paid by quick canola sales, farmers could turn to more careful marketing of the rest of their crops.
DePape said it wasn’t as though farmers did not know about carrying charges, price inversions and seasonal basis level patterns, but they played less of a role than they did in entirely open market systems like the United States.
He said many farmers misunderstand what some crucial signals are saying. For instance, a market with good carry, which is when the price of de-ferred futures contracts are substantially higher than nearby prices, gives farmers an opportunity to price their crop now for later delivery at a premium.
However, many farmers think they are seeing evidence that the market is predicting a future rally in crop prices and won’t price anything now be-cause they assume higher prices will come anyway.
If they see an inverted market, with nearby prices higher than deferred prices, many will say they think the market is predicting a future rally that will make deferred prices catch up with nearby prices.
Instead of seeing the inversion as a signal to sell earlier rather than later, they see it as another bullish signal.
“These are two different market signals telling you two different things, and you’re (incorrectly) reading them (both) the same way,” said DePape.
In reality, an inverted market is an opportunity to sell and move now rather than later, and a market with carry is an opportunity to price or hedge now for deferred delivery at a premium that might not last.
“All else being equal, the (futures) market will drop to where it is now,” said DePape, explaining why carrying charge premiums often don’t last.
He said farmers have more marketing options now, but many will need to learn more about crucial storage signals if they want to get the best returns possible.