Good morning,
Here are a few of the things we’re watching and discussing as harvest begins.
What We’re Thinking About This Week
• A friendly WASDE was met with lower prices.
Friday’s WASDE gave the market a generally supportive balance sheet, but the price reaction was disappointing.
That has our attention.
We’ve been watching for signs that the recent rally could be transitioning into a larger correction. When a market receives supportive information and struggles to rally on it, the reaction can sometimes tell us as much as the information itself.
That doesn’t mean the larger opportunity is over. But it does mean we’re willing to let the market correct and see what opportunities that correction creates.
• A deeper correction could create several opportunities.
We don’t view lower prices simply as lost value. A correction can change the opportunities available within the marketing portfolio.
If futures spreads widen, we’ll look for opportunities to roll existing futures hedges or HTAs forward and capture additional carry. We may also have opportunities to hedge that carry using bull futures spreads.
A deeper correction could also give us an opportunity to create upside exposure against prior sales or hedges without simply re-owning those bushels. The objective isn’t to undo good marketing decisions. It’s to evaluate whether the market gives us an attractive way to add additional value to the overall position.
We’ll also be paying attention to the structure of any correction. If the market spends time correcting or consolidating and eventually challenges the recent highs again later this fall, we’ll want to evaluate the amount of potential energy that has accumulated beneath that move.
Sometimes what happens between rallies is just as important as the rally itself.
• Rising energy costs are becoming a basis concern.
Basis deserves increased attention as energy costs—particularly diesel fuel—rise.
Transportation is a significant component of moving grain from areas of production to processors, feeders, exporters, and other end users. As transportation costs increase, some of that expense can ultimately work its way back into the price paid for grain through basis.
That doesn’t mean every local basis will weaken. Local supply and demand still matter enormously, and soybean processor basis in particular has remained strong in many areas.
But higher transportation costs change the economics of moving grain. We’ll be watching closely to see how local and regional basis responds as harvest volume increases.
• Harvest delivery means basis decisions need to be made.
Harvest is beginning, and clients with grain contracted for harvest delivery need to make sure the basis component of those contracts has been addressed.
Most processors and end users require basis to be established prior to delivery, although individual buyer policies vary.
If you have an HTA or other contract with open basis that will be delivered during harvest, now is the time to understand the buyer’s requirements and evaluate the available basis.
Remember: the futures decision and the basis decision don’t have to occur at the same time.
• What does your combine confirm about your marketing position?
Harvest begins turning estimated production into known production. As that happens, we need to continually reassess what your actual production means for your marketing plan.
If yields are outperforming preseason expectations, your percentage marketed may actually be declining even though we haven’t changed any existing sales or hedges. That’s not necessarily a problem. Those additional bushels also represent additional marginal revenue and give us more inventory to manage as new opportunities develop.
The opposite deserves just as much attention. If yields are falling short of expectations, your marketed percentage may be increasing faster than anticipated. With fewer unpriced bushels remaining, we’ll want to evaluate whether there are opportunities to manufacture additional upside against prior sales or hedges—or use other strategies designed to add value to a smaller crop.
Keep your FWS Account Manager updated as yields unfold. The faster we replace preseason estimates with actual production, the better we can adjust your marketing position to reflect the crop you actually have.
Where Our Market Plan Stands
As harvest progresses, our focus will increasingly shift from managing expected production to managing known inventory.
That doesn’t mean we abandon the futures market. It means the decisions available to us begin to expand.
We’ll continue evaluating flat-price opportunities, but basis, carry, storage economics, hedge management, and actual production will play increasingly important roles in determining what we do next.
If the market corrects, we’ll look for the opportunities created by that correction. If strength returns, we’ll be prepared to continue advancing the marketing plan.
Either way, we want the next decision to improve the overall portfolio rather than simply react to the latest move in price.
Grain Marketing Thought
The market’s reaction to information can be more important than the information itself.
Going into Friday, we wanted to know whether USDA would provide additional fundamental support for the market.
We received a supportive balance sheet.
Prices went down anyway.
Rather than immediately deciding that the market is bullish or bearish, we’re interested in what happens next. Does the market absorb the selling and regain its footing? Does the correction deepen? Do spreads widen? Does basis change? What opportunities does the move create?
Our job isn’t simply to interpret the report.
Our job is to understand how the market responds to it—and be prepared to act on the opportunities that response creates.
Have a great week,
Ron Wall