Volatile grain markets make marketing decisions stressful

LAKEVILLE, Minn. — The volatility of commodity markets makes it difficult for some farmers to make marketing decisions.

“The financial health of your operation, how well capitalized you are and your profitability all effect your capacity to bear risk,” said Elaine Kub, a charted financial analyst during the Women’s Seminar organized by Compeer Financial.

“As ag producers, we’re not just talking about our $100,000 inheritance from a relative. We’re talking about our entire livelihood that’s at the whims of these risky commodity markets,” she said.

Markets have swings and troughs, overreactions and underreactions to news shocks, Kub said.

She talked about a wheat price chart that included prices from 1750 to 2018, which started with the London Grain Exchange and switched to the Chicago Board of Trade.

“The message from this chart is clear — there will be moments when a grain market will spike when something happens to disrupt the supply and end users become desperate to buy the grain at any price,” she said.

Kub noted the Napoleonic War, World War I and 2012.

“But what always happens is the commodity market will move back down towards the cost of production,” she said. “So, if you cannot grow your product cheaper than anyone else in the world, you will be punished in an unprofitable market environment.”

The most common pattern in grain markets that are affected by seasonal weather is the highest and best-selling opportunities occur in the spring and summer, said Kub, who grew up on a family farm in South Dakota and now farms corn and soybeans on ground that she rents from her dad and uncle.

“In the last seven out of 10 years, the best opportunity to sell corn was before harvest, but in 2020 and 2021, the best opportunity was to wait,” she said.

Kub made a chart of December corn contracts for the past 20 years.

“I took out the years when there was a weird supply shortage and the supply-to-use ratio was 10% to 15% and then I averaged the date of when the contact hit its annual high,” she explained. “The day the new crop corn futures contract is most likely to hit its annual high is June 17.”

That makes sense, Kub said, because that’s when the corn crop is at the most risk.

“When the corn is tasseling and pollinating, that’s when end users are most uncertain about the future supply and therefore most willing to pay high prices,” she said. “This is a good opportunity to lock in prices and take some risk off the table.”

This time period is also true for soybeans.

“The average date for the annual high for new crop soybean futures is June 30, about two weeks after the average high for the corn market,” Kub said. “But in years where there is a supply shortage, the average high tends to be Oct. 1.”

In 2022, U.S. farmers produced 15.2 bushels of corn and most of that crop went toward ethanol or feed.

“About 1.9 billion bushels are exported, some corn goes towards industrial use and the ending stocks number at 1.2 billion bushels is 8.9% of the overall usage of corn,” Kub said.

“Any ag market that has a stocks-to-use ratio less than 10% is a bullish market,” she said. “That’s when you tend to see price spikes, so don’t expect the market to fall down to the cost of production while this stocks-to-use ratio is so tight.”

The stocks-to-use ratio of soybeans is even tighter than corn, Kub said.

“The ending stocks of soybeans at 225 million bushels are not much and it makes end users very nervous,” she said.

“That’s why we’ve seen soybean prices so strong and why soybean prices are so vulnerable to a sell off when we get into the South American harvest that is coming on now.”

The soybean-to-corn-price ratio historically should be about 2.5, Kub said.

“If it’s higher than that, it’s saying soybeans are overpriced,” she said. “In a year like 2023, when fertilizer prices are still high, soybean prices don’t have to be as high priced.”

Last April, Kub said, there was an opportunity to lock in prices for the 2023 corn crop at $6.50 per bushel.

“It’s dwindled down since then,” she said. “I’m not predicting that history is going to exactly repeat itself, but for the longer term expectation in markets, that pattern is common.”

By knowing patterns about commodity markets, Kub said, she hopes that will help farmers be willing to lock in prices to take some risk off the table and increase their confidence to be proactive in marketing grain.