Producers face shortened marketing season
Feb 6, 2009 10:30 AM,
By Steven H. Scott
Scott & Associates Agricultural Marketing, Inc.
On May 21, 2008, seven soybean futures contracts were traded at the Board of Trade in Chicago. Nothing unusual about that unless you consider those contracts called for delivery of soybeans in November 2011. The seeds that will produce those soybeans will not be planted for another three years!
That spring day effectively marked the beginning of the 2011 soybean marketing season, a season that will extend to August 2012, four years and three months after it began.
Every one of those trading days will present a pricing opportunity to a producer. The purpose of the futures market after all is to allow producers and end users to lay off risk. The longer the season, the more chances a producer has to secure a good price.
That is how it is supposed to work. Unfortunately, because of decisions made by others, the actual marketing season available to most producers will only be a few months long. The risk implications of this recent development are very troubling.
Most local buyers are no longer willing to book crops very far ahead — in some cases no more than 60 days out. They are reacting to the wild historic market we have just gone through.
That decision may simplify life for the buyers, but for the producer it means a very short marketing season. Instead of a three-year to four-year pricing window, producers who wait on their local buyers to offer a price will now only have a few months to work with. That leaves producers with a disturbing formula; fewer opportunities equals greater risk.
It’s like taking a long duck season down to one weekend. Maybe the ducks will be there, maybe they won’t. If good prices are not available during the time the buyers are willing to book, the producer is out of luck.
It has not always been that way. Prior to 2008, if the new crop futures contracts were trading, most grain buyers were willing to put on a “hedge to arrive” contract, guaranteeing the current futures price with the basis to be determined later.
They would simply sell or “short” futures contracts in order to hedge their risk. That meant a producer had easy access to the majority of the marketing season and could lock in profitable prices that often show up well before the growing season. That door has now been closed.
Although there are dramatic exceptions, 2008 being one, history tells us being able to book crop early in the marketing season is very important. Take corn for example. In the last 15 marketing seasons, the best prices we saw prior to harvest came before the growing season eight out of the 15 seasons.
Common sense tells us limiting the marketing season will turn out to be a very inefficient way to manage price risk.
Realizing this is no time to reduce efficiency and add risk, producers and their lenders will struggle to come to terms with a new reality; if buyers are unwilling to lock in prices early in the marketing season, producers will have to do it themselves. They will have to turn to the risk managing tools that are available to them, the futures and options markets. That means for many a steep learning curve as well as the challenge of coming up with the financing required.
Lenders will play a key role. Many producers simply do not have the cash reserves necessary to effectively use futures and options as marketing tools. They will have to ask their lenders to become more directly involved with marketing and make funds available outside production loans.
The alternative will be to stay at risk and hope for the best. That is not a formula for long-term success for anyone.
e-mail: steve@scottagri.com
