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DAVID KRUSE

By Staff | Nov 27, 2015

Perhaps we should title this report, “How will farmers help end-users get their grain away from them?”

Corn and soybean prices are not $7 and $13 per bushel anymore. They are not even above what is now an overpriced, slow to come down, cost of production.

On the way up from $3 corn to $4, $5, $6 and higher, farmers were aggressive about forward-pricing because they liked those prices.

Those who subscribed to this report know that we advised not to forward sell when prices were rising in the major bull market.

We forward sold nothing, holding all of each crop storing it into the next marketing year so that we captured more of the bull market from each crop.

Farmers who sold corn for $3 and then $5 as prices rose missed much higher prices by the time they delivered.

We are now in a bear market and farmers may eventually become surprised over how low those prices will go – just as they were initially shocked about $7 corn.

In a bear market you do the opposite of what you should have done during the bull market. You aggressively forward price and you sell early.

The carry gives you forward-pricing opportunities that must be taken advantage of. If you store, it is to capture basis improvement and the carry.

Farmers, by and large, are doing it wrong. They hedged much less than they did when previously in a bull market and stored much more of their crop unpriced and unhedged wishing and hoping for a post-harvest rally.

They are typically behind. Last year we had a post-harvest rally. We advised to sell and not hold into spring, but most farmers stored for lower prices and even missed the summer rally.

The current mantra being touted by market advisors is that “tight farmer holding” will produce a rally. Good luck with that.

Commercials believe that grain/soy prices will decline and they are more than willing to let the farmers hold the devaluing inventory.

They are experts at separating farmers from their grain/soy without paying for it.

The most successful scheme and device that commercials use to separate farmers from their grain ownership is price-later contracts, otherwise called NPE contracts.

Commercials will often begin offering free storage after harvest when farmers can begin moving grain to elevators while the weather is still nice or during the winter while they have time.

They don’t charge them storage and they have a number of months in the contracts when they can price the grain at any time. The producer has given up physical control and title to the grain and the elevator has sold it to the ethanol plant or hog integrator and it has already filled that demand.

It has been crushed or it has been fed and may be ethanol or pork before the farmer ever prices it or is paid for it. The farmer has essentially given use of his grain/soy to the very buyers that he wanted to bid for it.

They don’t have to bid up for it because they already have physical use of it.

The farmer is hoping to ride a market that he has diluted. Farmers think that they are too small to impact the market and the commercials hope that they keep thinking that. This adds up.

So how tight is tight farmer holding? Many with grain in the elevator from harvest will opt for NPE contracts because they save a point in drying and shrink over warehouse receipts. My advice has been “either own it or not.” If you are not going for a warehouse receipt then sell and wait for timing to buy call options.

November crop reports again show burdensome supplies, South America is poised for production records and who is going to reduce acres here next season?

We will need bad weather in the U.S. next year to keep carryovers from becoming more burdensome. Isn’t it rather convoluted that we have these burdensome stocks and low prices that because farmers own all this grain minus whatever they let end-users have without pricing that someone could even begin to call that a market plan?

If anything that I have just said makes sense to you and you are on the wrong side of this, we do have a managed bushels program that can help you market bushels. Instead of worrying about pricing this year’s crop that should have been already covered, rallies should be used to forward price next year’s production.

A post-harvest rally is unlikely to get back to levels that farmers will accept despite “tight farmer holding.” They will turn over their crops through NPE contracts so end-users get use of it without having to pay for it and farmers will be worried about pricing this year’s crop instead of next years like they should be doing.

Farmers got ARC payments so have some cash to avoid grain sales. That means they can store longer so the price goes down and the market will have eaten their ARC payment.

Isn’t that pretty much how it will work? If farmers all know this is how it will work out, doesn’t it make sense for them to do something different?

Again, I will repeat downside technical targets of 347 and 318 for corn with 810 and 776 for soybeans.

The bellwether macro markets of the dollar and crude oil are pointing lower for grains/soy and USDA didn’t help.

“Tight farmer holding” is not all that it is being made out to be.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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