A tractor with a grain cart unloading wheat into a semi trailer in a agricultural autumn landscape

BACK TO BASICS

We’re in a tougher market, so forward contract most of 2025 crop before the 2025 harvest

Grain is not scarce anymore.

North American farmers are in the middle of harvesting their second consecutive record crop and between those two harvests, South America brought in the biggest soybean crop in history. While these results are clearly a success from an agronomic point of view, they have an impact on prices and how we need to conduct ourselves as marketers.

As the commodities markets descend into an extended period of lower prices and tighter production margins, there’s no need for farmers to become passive victims of the situation. In fact it is in times like this when taking control of the situation is the best way to limit damage to the business. The only time that a farmer needs to be a price taker is when he runs out of time to market a crop.

When markets are well supplied, the futures market adjusts into what is called a “carry” posture, where the highest prices are trading for the farthest forward delivery periods. Intuitively, that makes sense to all of us. If we are not about to run out of a product, there isn’t going to be a buyer who is scrambling to cover a short term need and willing to pay a premium in order to get a prompt delivery. Prices are higher for the delivery months that are 6, 12 or 18 months into the future. In those situations, you’ve got buyers who are essentially saying that there’s a certain amount of risk that the global market could change going forward, they’re prepared to offer up a premium in exchange for the assurance of supply in those farther forward times. Our opportunity as grain producers is to sell that forward risk as a way of locking in premium prices.

A carry in the futures market does not mean that grain will be worth more later, it means that it is worth less now. Essentially, in order to get prompt movement, a seller has to be prepared to accept a lower price.

As farmers we should, except for tidying up bin bottoms and selling off our surplus production.

We should never put ourselves in the position of selling at the spot market price. In 2021 and 2022, a farmer could get away with that strategy because the entire market was very high due to global production issue, but even then it wasn’t the best strategy. It was just acceptable. With the 2023 crop it didn’t work. For the 2024 crop it is not going to work. And for farmers who are serious about locking in those carries, they are marketing 2025 crop now, because we already know that spot market pricing is not going to be our friend in 2025 either.

Selling the forward carry has been a pretty reliable way of locking in higher prices between the mid 1990s and 2021. Most Ontario farmers made it a part of their business strategy. The problem appears to have been that the record-high prices, which we enjoyed in 2021 and 2022, seem to have created a gap between producer price expectations and the reality of what the markets will actually pay for grains and oilseeds based on the current supply situation. The lack of farmer forward selling of crops is almost entirely the result of this gap between price expectations and the real market, and it has the very unfortunate consequence of pushing producers into selling in the worst possible place — the spot cash market.

The empowering part of a marketing plan is that it eliminates the need to be a price taker due to cash flow requirements.

I have a rule for my own farm business that I don’t plant anything until it’s at least half sold. So the wheat, which I expect to deliver in July of 2025, was actually half priced in May of 2024. The reason that it’s only half priced is because there could be a yield limiting incident like winter kill, which could scale back the harvested production. The reason that it was priced in May is a self-imposed deadline that if I don’t get some wheat priced by October, I simply won’t plant any. Assuming that the wheat looks good in the spring, I will likely lock in a price on another quarter of it in March, April, or May and then by harvest we’re really just tidying up the last bit of the crop pricing.

The trick to forward contracting is to spend enough time learning about the market to have a solid understanding of where prices are likely to trade based on the global marketplace. Once you have a realistic expectation of the price range, simply place target orders near the top part of the anticipated price range and then leave it to unfold.

One of the fun things about really big crops is that the futures market tends to bottom out right at the start of harvest and then we rally up from there.

Between some yield adjustments as harvest unfolds and some weather issues as the South American crop emerges from the ground, we are going to see some price rallies in November, December, and January which will create opportunities to forward contract both ’24 crop for spring and summer deliveries and to lock in a portion of 2025’s production.

We know how to manage our business through a tough stretch, we just have to get back to the basics and take control of the situation.

Steve Kell is a Simcoe County crop farmer and handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.