When the bottom drops out, it helps to have a floor
Read Time: 5 minutes
By the Cargill Elevate team July 21, 2023
Do you have a risk management plan in place as we get closer to harvest? August is right around the corner and, historically, prices tend to decline in a year with favorable August weather. Prices typically drop in a good growing year because this is when harvest begins and there is a glut of grain coming off fields and into terminals, resulting in higher supply than current demand. With a high risk of the bottom dropping out in the futures market, this time is a great time to think about adding protection to your plan.
Why is August a good time to explore protection strategies?
If you don't already have sales on the books or are looking to secure more bushels at profitable levels, consider establishing part of the pricing equation. Basis is closely tied to demand and if export demand is weak, this will lead to lower basis levels at river locations, which in turn lessens the competition for domestic needs. If you have fall "must move" bushels, make sure you keep up with local basis levels, especially if there is a large crop in your area. Basis is widest in the fall so if you aren't keeping up with these levels in August, you could risk losing opportunity to set basis at a more attractive level.
Let’s assume that we'll have a large crop this year despite drought in many areas. Export demand basis could take a major hit due to the size of the crop coming off the field. It’s no longer a “hot commodity” and there is a bulk of supply flooding the market. It’s crucial to lock in some, if not all, of your must-move bushels. If it does turn out to be a good production year, you will see quickly that markets will trend lower as we get closer to harvest.
If you have must-move bushels and are very bearish, setting a floor to protect your price will allow you peace of mind and the opportunity to try and capture potential upside. There are different types of floor options available depending on your risk tolerance. It’s important to find what works best for you and your market bias.
How can floor strategies work for you?
As you work on protecting profitable price levels, floor contracts can be of value. Think of it like insurance, purchasing some type of protection strategy and setting a floor will protect your long-term profits if prices plummet. You insure your house, so why not insure your livelihood? Grain marketing decisions can be emotional. By protecting your price with a floor and leaving open upside opportunities, you’re taking some emotion out of the equation. If you’re looking for ways to help you insure your profits and protect your price, you can explore our Insure contracts here.
It’s important when you’re entering any type of floor strategy to make a note of why you’re making this decision. Was there rain that made you bearish on price due to higher prospective production? Was there a production risk you were worried about? What was your sentiment at the time of selling? Bullish, or bearish? Understanding what was going on in the market at the time you decided to sell helps with hindsight when you are comparing your actual profit at the end of the year.
When is the best time to use floor protection on price?
As the market becomes increasingly global, and bigger price swings occur, it’s more difficult to pinpoint exactly when you’ll need price protection. Do you still have un-sold, “must move” bushels in fall? Do you feel bearish? If so, now is the time to consider setting a floor. Cargill Elevate can help you map out a grain marketing plan that is customizable to your profit goals and what strategies can help you achieve those goals.
