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Honored Advisor

Re: Farming VS trading futures

Yet nearly every market “guru” quotes usda numbers as fact. Garbage in= garbage out.
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Honored Advisor

Re: Farming VS trading futures

Sorry for the volume. The discussion just touched on something I been discussing with a guy I advise.
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Senior Contributor

Re: Farming VS trading futures

Calendar correlations are at best coincidental, unless there is some kind of fundamental reason underpinning them. In commodities it would stand to reason that the worst months for price would be when the most supply comes to market, in oil you would think the best months would be January and July since each hemisphere has its coldest days in those months. Doesn't happen that way, for a lot of different reasons that no one ever will figure out because no one can talk with enough traders to get an accurate survey. 

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Senior Contributor

Re: Farming VS trading futures

Capital Asset Pricing Model. It says market prices are determined through evaluation of all knowledge known at any moment to a market. So whether the USDA numbers wind up being correct or not in the end, when they are released that's the most accurate information that is known at that time and that's why the markets move on that data. Someone always has something to do in every market, and the market has to provide a price for them at all times. Prices are determined by the CAPM.

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Frequent Contributor

Re: Farming VS trading futures

Ray - why do you not recommend hedging "unless the markets turn bearish"??  I am a small farmer in South Dakota (500 acres).  My observation the last several years is that corn prices are usually highest NEXT JULY.  (Bean price highs are next June). I use crop insurance and my 20K bu bin to sell ahead - often more than a year ahead. So I do sell during price rallies, just not spot. The only time I sell at spot is if my production is way over what I estimated (may happen this year if we can ever get back in the fields). For example, last spring/early summer, I sold about 1/3 of my in-the-field crop for delivery in July 2019 for an average price of $3.82, and 1/3 of my crop that won't fit in the bin for delivery this November/December for $3.72.  The last 1/3 will be unhedged going into the bin in case there's a price rally this coming spring 2019.  I have also already sold 1/6 of the crop I will raise next year for $3.60.  

 

I am not a chart reader, and I am not a trader. I farm with old equipment (1980's - 2000's tractors, combine, planter, and semi). But I know my cost of production and my desired profit levels, and when the markets offers me that, usually through some weather scare somewhere plus the carry, I take it. I admit it took me many years to get to this point, where I can use last years' crop to pay for next years inputs, taking advantage of early discounts, etc. But scrimping on personal expenses for several years to build this working cash cushion into the business is starting to pay big dividends. 

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Senior Contributor

Re: Farming VS trading futures

I think you have an excellent plan that does a great deal to enhance your revenues, Congratulations. 

 

In answer to your question, I do not like to hedge in bullish markets because the probability of the price increasing is greater than the probability of it decreasing, that's why its a bullish market. Hedging thus is not in the producer's favor during a bullish trending market, your hedges are more likely to lose than win. Think of the farmers who lost the chance of a lifetime in 2012 because they hedged into a bullish market and missed the move up to $8. 

 

I also am not a subscriber to the calendar method, unless there is a fundamental reason that would cause such a phenomenon to exist. You would think that January and July would register the highest prices of the year for crude and heating oil since those are the coldest months of the year per hemisphere, but it never seems to work out that way. But if your strategy works for you, then by all means keep doing it ! The important thing is that you are taking a lot of the risk out of the finances of your business with a program that has been working for you, and that's commendable and should be continued. 

 

I have never done or read a study of what month registers the best prices one year forward, but since the tide of prices rises and falls for all contracts at the same time albeit at different heights, my guess is that the contracts one year into the future will peak and valley at the same ti.e as the present first delivery month.   

 

So with that in mind, here are the months when corn prices peaked for each year since 2008 :

2008 : June

2009 : June

2010 : December

2011 : June

2012 : August

2013: March

2014 : May

2015 : July

2016 : June

2017 : July

2018 : May

 

So you see, while June more than any other month has had the most high prices registered, its not overwhelming and in fact its less than 50% correct. Conversely, in most years, prices peak from May to August, so perhaps that is the best time to set hedges. I prefer to see what the trend in price is and what is driving it on a year by year or season by season basis. But if you are comfortable with your strategy and its making you money, please carry on ! Anything that improves your cash flows and profits is worth doing. 

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