What an exciting way to start the year! Whether your views of the upcoming year are good or bad, we know that we are in for a lot of volatility and change. Today, prices for both corn and beans are very profitable for the 2021 crop that we have produced. These markets have shown great volatility with big intraday moves as well as showing some bullish trends.
We are currently being rewarded for the dry weather in South America that has reduced their production. Stocks are likely to be tight this summer as we start growing our 2022 crop. How long will this bullish market last? No one knows the answer to this question. Many different things can change these markets. Russia could invade Ukraine, China could again reduce its imports, we could shift intended acres in this country to plant more acres to one crop over another. So, what does it mean to me as a producer and how can I use all this confusing and conflicting information to make good management decisions?
First, we must recognize that we are selling grain at profitable levels. My marketing plan has changed several times this year as scheduled sales have been pushed back due to market rallies and bullish news. There are few individuals that will sell all their production at the top of the market. Instead of making large sales, I have chosen to make several smaller ones. Each time the price advances above trend line resistance, I have made additional smaller sales. Yes, the market has continued to go up but I have no feelings of disappointment for making earlier sales as all grain has been sold with good profits.
The questions become: at what price will we choose to finish our old crop sales? Should we be looking one to two years in advance to lock in some of these current prices? All of us should remember the old adage that “the cure for high prices is high prices”. This old saying has always remained true and will continue in to the future. When prices get too high, either the end users will find a substitute product or producers will find a way to grow more of this commodity until prices return to sustainable levels.
Very few producers that I work with are comfortable with forward pricing an unplanted crop two years in advance. This includes me. However, there are ways to establish a price floor regardless of production issues. One of these ways is to use the options market and buy a put option.
Today, if a person were to buy a November 2022 soybean put option (right to sell) at $13.70 it would cost 96 cents per bushel. By doing this a producer could establish a price floor of $12.74 for 2022 soybeans. This looks like a good minimum price for this fall but the cost to do this is nearly $50 per acre which we will need to add to our crop budgets. Is this an expensive or cheap investment? The answer to this all depends on what happens to the markets this summer. If beans were to fall to $10 you would feel like the smartest person in the world as you would have added $2.74/bu to your bottom-line next fall. However, if we were to have a drought in this country and beans rose to $20 then you would have spent the extra cost.
With the short crop in South America, we are going to have good prices through the spring and into the summer. The crop insurance revenue price is established during the month of February and is likely to come in at a very high level, thus insuring us a good price for 2022. After this price is established, it will be our job as producers to make decisions during the summer to market the 22 crops as weather dictates.
There are several new and existing private crop insurance products that we will explain later that can add on to this guarantee. Each year many of these are offered but few times are they cost effective. This year may be the exception where these products might be attractive to significantly add to your minimum price floor.
Fertilizer prices may be volatile all year long. Thus far nitrogen prices are up more than 200% with phosphate and potash prices significantly higher as well. The biggest move we may see in the future might be the potash market as tensions rise with Russia who is one of the largest exporters of potash. This is more of a political issue than a supply issue as tariffs and invasions could greatly upset these markets. Instead of this being only our problem, it has become a worldwide problem for all countries.
Inflation will remain an issue for 2022 in all aspects of our businesses. Even with inflation, this could be a great year for agriculture. If you are old enough to remember the 1970’s, we had high inflation and there was profitability in the ag markets. Anytime inflation is higher than interest we really have a negative interest rate. The assets we own are appreciating faster than the cost of ownership. This is the very thing that has driven the current housing market and the prices of land. Over the years a lot of wealth has been created because of a high debt load during times of inflation. On the flip side of that, the 1980’s saw high interest and declining values which caused the death of many businesses that were caught with too much debt. It’s all in the timing.
Going into 2022 I would challenge each of you to make a budget and ask yourself these important questions.
-What will it cost to produce each crop?
-How can crop insurance help protect my bottom line?
-What will prices need to be for my operation to make money?
All these questions are very important to answer prior to planting the crop. Then the big question becomes what assets do we have in our operations that are not fully utilized and how can we use them to add to the bottom line? The current administration is looking to subsidize cover cropping practices and carbon credits. Even grain only farmers may benefit from planting cover crops to be harvested by livestock operations or to collect carbon credits. Thinking outside of the box or doing things we have never done before may be profitable in years to come. By doing these few steps you can insure yourself a profitable 2022 and beyond.