The State of Ag in Disrupted Markets
When you look at soybeans, wheat, and corn right now–the grain complex–professional marketers say things will get better, they just don’t know when. So, the challenge is getting through the interim. Even with the disruptions (most recently from COVID-19), you can take steps to control your risk. A disciplined approach will position you for opportunities if weather rallies take place.
In markets, as in so many other things, knowledge is power. In this episode of In the Driver’s Seat, we gain market insights from Dean Durdan, General Manager of Risk, ADM Carbohydrate Solutions; Jeff Lloyd, Director of Risk Management, ADM Global Oilseed; and Todd Harman, Regional Manager for ADM, Hutchinson, Kansas. These grain marketers have personal connections to farms and also provide farm management tips.
Here are key takeaways from the discussion:
Practice ingenuity beyond grain marketing
Three things have zapped the world grain markets in quick succession: African Swine Flu, the trade war with China, and now COVID-19, but our grain marketing professionals see opportunities for those who pay close attention and prepare themselves to act.
Plan to be strategic in your marketing, but also look at opportunities aside from the market. Try to strengthen your operations through good input decisions, leveraging crop insurance, buying up as much low-cost fuel as you can store, and making use of zero-percent financing, as well as government programs to help the farm economy.
Grain escapes demand destruction seen in dairy and livestock
Our guests draw a distinction between grain and livestock markets: You can’t store animals, and milk needs refrigeration. With the loss of normally steady restaurant and industrial demand and the closing of processing plants due to COVID-19 outbreaks, we suddenly see extreme examples of animals and products going to waste. In contrast, the world grain market only sees two harvests a year.
“We’re a little different in the corn markets in that we have a much more fungible commodity that we’re comfortable storing in different manners,” says Durdan. “You look around the country and see ground piles. We can always build more bins and prepare better because it’s a one-time event per year and we make plans to accommodate.”
Collapsing energy markets drag corn to lows
However, the relationship between grain and energy markets is playing out in a big way. Corn’s heavy exposure in the ethanol market is obvious in today’s prices. With six weeks of reduced travel, and an uncertain return to normal, the ethanol market has been in free-fall alongside prices for unleaded gasoline.
“Things just turned ugly for corn quickly,” Durdan admits. “We’ve seen a 70- or 80-cent sell-off from the highs, sitting here at lows that we haven’t seen since 2016…and futures are pricing in an extremely bearish situation for 2021.”
The medium-term picture is not rosy, Harman acknowledges, because when restrictions are lifted, it’s not as if people will double their driving to make up for three months off, so the loss will take a while to recoup. Approximately 20 percent of soybean production goes into biodiesel, so there also comes a softening of demand in that market.
Bright spots hinge on growing season weather
Soybeans and wheat may be quicker to catch market rallies, say our market analysts, but don’t count corn out yet despite obvious challenges. If yield or weather play as wild cards, weather-based rallies may provide some price relief. Be in a position to capture the brief opportunities.
“Everything before you plant a crop is based off of estimates and expectations. And then once you put it in the ground, mother nature takes it from there,” Durdan observes. “Obviously from here until basically the fourth of July or a little bit later, that production cycle will be determined by the weather. With a fund position sitting short in the market and almost everyone already agreeable that corn is going to have trouble rallying, this is where we catch people by surprise.”
Durdan reminds producers that the most volatile time frame for corn prices tends to be from late April to mid-June or early July. Pay attention. If you find yourself undersold, make sure to have price targets in mind and be ready to pull the trigger.
Soybeans and wheat may pose opportunities
Lloyd, who trades for ADM in the soybean markets, is more optimistic about soybeans. He projects that total production in soybeans may drop some, while idled sources of demand, including China’s recovery from the African Swine Flu, may come to the market looking for supply.
“I think there are some opportunities going on that can be a little bit constructive,” says Lloyd. “I look at the Southern Hemisphere crops, which are being finalized now. There’s maybe 4 or 4-plus million tons of supply that can be reduced between the Argentine crop and the Brazil crop. [Also], we’ve seen demand out of China…starting to ramp back up. I still think there are opportunities for new-crop bean selling in the 9s. I don’t want to paint a really bullish picture, but I do think we’ll have some opportunities to see some risk put back into the marketplace.”
Harman noted that there is a very real possibility for weather-related rallies in the wheat market as well.
“It’s dry in Kansas and in Oklahoma–the traditional Hard Red Wheat growing areas. It’s dry in the Black Sea area of Ukraine and Russia. I really think if things come together, we could have a violent reaction higher. If we do get rains, we kind of bleed lower here, but from these levels, the rewards outweigh the risks, in my opinion.”
Time for outside-of-the-box thinking
Harman and Durdan are also farm producers besides their jobs with ADM. Each reflected on ways to stay in business during these unprecedented challenges. “Don’t just focus on grain prices,” they say. “Consider strategies on the cost and financing sides.”
“One thing you can do is buy up the cheap spot prices (for fuel), Harman says. “The other thing you can do is think about the financing of your business. Interest rates are zero. [And] don’t forget about the Farm programs–the PLC (Price Loss Coverage) or ARC (Agriculture Risk Coverage), COVID-19 relief, and crop insurance. All of those things need to be added together and work in conjunction with the total revenue opportunity on your farm.”
Harman also says that chasing high yields with heavy inputs deserves a second thought.
“Perhaps it doesn’t make sense to go out there and manage for maximum production if the marginal dollar of revenue coming off that extra bushel is less than the cost of what it takes to grow it,” he reasons. “Maybe we should manage less intensively in this environment and not lose sight of the other revenue opportunities coming at us.”
Want to position yourself to take advantage of weather-based volatility in the market this spring and summer? Call on your ADM representative to help you set price targets and plan ways to capture potential rallies. Contact us today!
ADM is providing this communication for informational purposes, and it is not a solicitation or offer to any particular individual’s or company’s objectives or needs, which should be considered before engaging in any commodity transactions based on these recommendations. The sources for the information and recommendations in this communication are believed to be reliable, but ADM does not warrant or guarantee the accuracy of the information or recommendations. ADM or its affiliates may hold or take positions for their own accounts that are different from the positions recommended in this communication. The information and recommendations in this communication are subject to change without notice.