Unexpectedly Strong Commodity Prices Create Opportunity
Maximize Farm Income with the Right Strategies and Planning
Unexpectedly strong commodity prices are good news for grain farmers and cattle producers this fall, and they create opportunities for a prosperous 2021. But evaluating your risk and determining the right strategies will be crucial to maximizing income in the coming year.
The price of wheat this year went up more than $1 bushel and is currently over $5. One year ago, it was hovering around $3. Soybeans were down around $7 earlier in the year, but have climbed to over $10. Corn has gone up to over $4 a bushel for the first time in nearly a year, and milo is now over $5.
The strong grain prices have come along with record breaking harvests, significantly bolstering cash flow for most farmers.
The news is equally good for cattle producers, who are seeing prices from $110 per hundred weight for live cattle to over $140 for fat cattle.
Given that we are still seeing market surpluses in cattle and grain production, the strength of these commodity prices is counter to the normal supply-and-demand model, and suggests they are driven more by emotion.
Anticipation of a better trade agreement with China after the election, as well as expectations of lower harvests next year, could be driving prices, in part.
It looks like the current commodity surpluses will hold at least through 2021, a situation that doesn’t normally support such strong prices. So we don’t know yet whether the prices will hold or for how long.
Maximizing the opportunity
There are a few strategies that cattle producers and crop farmers can put to work to maximize the benefits of the current strong prices.
Cattle producers should be looking for the opportunity to buy cattle at the right price and hedge them in to make money on them. For instance, in a cow/calf operation, if prices shoot up, lock in prices on the calves using options as opposed to selling on the market.
Crop farmers have the advantage of being able to respond more quickly to favorable market conditions than cattle producers can. Now is the time to determine your break-even points, probable yields and costs, and lock in strong prices early. If your break-even is at $3.90 and wheat is at $5.30, determine how much of your crop you can lock in.
You can minimize your risk by planning ahead now. Determine where your risks are, such as weather. What amount of crop insurance do you need to recover from a weather disaster? Consider your inputs – fertilizer, feed and fuel. What can you prepay to hedge against price increases? If your cash position is strong because of this year’s record crops and strong prices, you may be able to use some of that cash to control your risk in 2021.
A word of caution. When factoring next year’s crop prices into your planning, be careful. Don’t bet on being able to get 70 cents more than today’s high prices. You may be sorely disappointed.
Though it’s not related to commodity prices, there is another strategy all agricultural producers should be looking at to strengthen their cash positions. Record low interest rates are making it advantageous to refinance loans and leases right now, and to buy new equipment and land. See our recent article on interest rate strategy.
The time to plan is now
The opportunity to get higher prices on your cattle and crops, and at the same time take advantage of low interest rates to lower your overhead costs, is not going to come along again for a long time.
Contact your Adams Brown advisor to discuss how you can take advantage of these favorable market conditions to maximize your farm income in 2021.