While market analysis is a fun hobby of mine, my real day job is helping my clients, who are farmers, manage the risks that come with turning their physical bushels into cash.
I always say that the farmer is essentially long, meaning that as long as they intend to plant a crop, they will have bushels to sell. The farmer is exposed to the risks associated with being long the market of the time when they agree to buy the inputs necessary to produce the harvest in question. And while there are several ways to manage that risk, with crop insurance, contracting or seeding and other tools, most farmers will tell you that marketing grain is the hardest part of growing it.
One of the clearest ways to seize opportunity in the grain and oilseed markets is to have storage. Commercials or grain elevators have made solid margins for years by taking grain in when it is abundant and therefore cheap, and selling it later when market movement is scarce, and values are stronger.
Farmers have seen this over the years, and listened to market signals, increasing on-farm storage in a big way. Farmers having more storage allows less grain to move into the market at harvest time with slower movement especially seen in the weeks directly after harvest.
The ability to delay sales or the movement of grain has put some power back into the hands of farmers, who once they’ve closed their junk doors can take more convincing than the local elevator when it comes to encouraging sales.
Slow farmer sales are a common topic of conversation this year, and one that could have an interesting impact on market dynamics in the coming weeks and months. The slow pace of farmer selling, especially of corn, around the world should not be surprising, as futures hover around 2-year lows and market opportunities over the past year have been fleeting.
Farmers by nature are also inherently optimistic, and many look to seize the better market opportunities they see available in the delayed time frame. Catch carry is a very hot topic this year as spreads and basis values, especially in the Eastern Corn Belt, are wider than what we have seen over the last couple of years.
It’s important to note, and a whole topic for another day, but how commercials approach risk management and catching carry the bushels in their bins and how farmers manage their risk are two very different approaches. Unless the bushels in their bins are covered, farmers are open to future risk other than basis and spreads, while commercials/elevators cover their grain on the inside, allowing them to ignore future movements almost entirely.
But back to the topic at hand, the slower pace to farmer sales is generally first noticed in a base, because the reduced flow of grain into the physical pipeline usually results in a firmer tone to paid values. A firmer tone to the base is not only the first step in encouraging sales, but it is also the first step in testing the depth of demand.
Brazil’s cash corn market is the best example of this right now. The poor start to the country’s growing season and questions about production potential have almost stopped farmers from selling corn. The reduction in grain flow pushed base levels higher across the country and gave exporters a choice. They can increase the values offered to farmers but doing so will result in a loss, leaving not participating in the business as their other option.
The Brazilian farmer is thought to have about 77% of his old crop corn, or the bushels produced in the 2022/23 crop year, sold, meaning there are about 1.4 billion bushels of corn left to be sold there by February or it will be carried forward
While new crop corn production potential is in question with the poor start to the growing season, there seems to be a consensus that we could see around 120 million tonnes produced. Of that production, the Brazilian farmer is said to have sold about 10%, well below the usual 35% sales rate.
Brazil is not the only place that is seeing a significant increase in farmer, and many estimate that the American farmer is only about 25% sold. Although this has created some basic strength in parts of the Western Corn Belt, it becomes increasingly worrisome when we think about adding that amount of unsold production to the other bushels looking to be turned into cash around the world.
If the US farmer is selling at 25%, that means we are looking at about 11.4 billion bushels of length that need to be marketed over the next few months. Add to those bushels the free length across Europe and South America, and you start to wonder what it’s going to look like when it comes to pricing and moving those bushels into the pipeline.
I’ll let you do the math yourself—and while yes not all of these bushels discussed here are traded on the board—it’s crazy to think that if farmer length were a field on the trader’s report engagement, it would decrease business and finance . positions extremely.
Farmer positioning is likely to be on display this week in a different way, as many are forced to decide between prices or rolling free bushels mid-week. Many farmers at harvest have a free period after delivery and before storage accumulating to price their bushels.
Some may have underlying contracts written against the December board and are looking at a 19 percent spread to March that risks widening. When an underlying contract is rolled over to the next month in a carry market, the spread is subtracted from the original value to account for the change in futures. This means that 20 below the December basis is now 39 below the March without accounting for fees. Others using storage or deferred pricing instead of basic contracts are looking at eye-watering storage rates of 10 cents a month with many charge minimums or drop-in fees.
In the end, with the changing dynamics in the physical market, the length of farmer and its impact on future movements will be interesting to watch in the coming months. It will likely create some interesting opportunities for commercials as well, especially if futures remain flat to weak.
Other things I look at:
- Russia and Ukraine. For the last couple of months things have been largely status quo, and with many talking about some sort of stalemate, we saw Russia step up attacks on Kyiv over the weekend. We have seen attacks on the rise at ports as well, with Ukrainian President Zelensky once again calling on NATO to help with their grain corridor. The concern remains that we are seeing the situation spill over in a way that restricts grain flow.
- South American weather. Although it looks drier and warmer than normal to end the month across much of Brazil, conditions have improved significantly across much of the country. More in the way of rain is expected in the extended forecast, with talk we could see the influence of El Nino dissipate shortly after the New Year.
- Off market sentiment. Cash flow and business sentiment remain huge drivers of market direction. If the farmer remains disengaged, but funds become interested in commodities again, it could be interesting.
As always, don’t hesitate to reach out with any questions. Have a nice day!
More Grain News from Barchart
As of the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.