This bull market in crops is a great laboratory of market signals.
It’s been explosive and dramatic, surprising virtually everybody with its strength.
And many of those signals have been conflicting. Technicals, supply-and-demand fundamentals, historical patterns, intercrop price ratios, and trends have been sending signals that don’t easily fit together.
Mike Jubinville of MarketsFarm laid out this situation in a recent canola market outlook. In the outlook, he reasserted his relatively bullish view on the canola market, but urged farmers to be cautious and take advantage of the opportunities the rally is offering.
While his optimism about canola prices is underlain by his assessment of the fundamental basis of supply and demand and the historical pattern that suggests strong crop prices will remain for a while, he noted a number of factors that could throw temporary or corrective interruptions into the market.
For instance, by one measure canola futures are in “overbought” territory, which means price gains have significantly exceeded the market trend. That can be a precursor to a correction, but it doesn’t have to.
By another measure, canola futures are not overpriced compared to other oilseeds, so there’s little reason for canola to pull itself down to fit in with its crop competitors.
“Canola is still competitive in the world market,” said Jubinville.
Export statistics are strong, but the trend is unsustainable.
“If we keep running at the weekly pace we are… we’ll have an export program in excess of 12 million tonnes or more, and that’s simply not possible,” he said.
Today’s high prices will begin to ration demand at a certain point, although they might need to go higher to do that.
This rally has tested farmers’ and advisers’ commitments to their marketing principles. People who priced early are often rueful about today’s much higher prices. But in terms of rational marketing plans, holding onto lots of unpriced crop into the mid-winter isn’t generally sound policy, especially in terms of business management.
There were ways to secure prices and cash flow needs without having to abandon the up-side potential.
In the fall I wrote about advisers and brokers like David Derwin who were using out-of-the-money call options to insure the up-side potential while pricing enough of the 2020-21 crop to ensure cash flow and income necessities.
Grain company contracts offer similar possibilities, in a number of ways depending on the company.
The challenge, as always, is trying to figure out in the summer or fall which risks you most want to hedge against. They’re seldom the ones that actually pounce and it’s very hard to anticipate all the potentials you’d like to have covered off.
The present strength of the crop market rally has been a godsend to those with unpriced crops. It’s also the sort of thing that undermines’ farmers’ willingness to stick to the careful marketing plans they make with their advisers, or just following long-standing practice.
This has often happened in the hog industry, where big rallies leave well-hedged producers sometimes feeling left out. That’s changed a lot in recent years because most lenders require their clients to protect their exposure.
To me at least, the lesson of this rally since summer is that it still makes all the sense in the world to hedge enough of your production to cover cash-flow needs through fall and winter. After that, it’s a matter of strategy and market outlook for pricing the rest of the crop.
But there are ways of providing upside protection that few farmers take advantage of. This year has provided a good opportunity to more deeply integrate strategies so the farm obtains both the security of the priced-in crop, and the potential for gains if an unanticipated rally ignites, as it did this year.