The markets are in turmoil. Can we make some moves to protect ourselves or limit the damage as we approach planting season and the time of year when we’re getting ready to move calves to feed? 
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It is clear that equities and commodities worldwide are taking a hit. Investors seeking safe havens are pulling their money out of both of those markets and purchasing securities (bonds). The agricultural industry is at a critical juncture in the production season. Many are approaching planting in the High Plains area. The majority of our calves will come off of wheat in the next 60 days. While I can’t think of a more socially distant group than those of us spending 18-20 hours of day on a tractor, there are some other options that will help mitigate financial damage to your enterprise.
The following market strategies are for educational purposes only. Evaluate your own enterprise thoroughly before making financial decisions. The market may change significantly in the next 24 hours. The picture is even less clear a month or two from now. Each of these suggestions is based on our understanding of current conditions, and laid out as ways to mitigate certain risks.
Crops
Crop Marketing
The price of all major High Plains commodities are taking a hit. Corn and wheat are both down about 1% over the week and cotton is down over 3.5%. The seasonal pattern for corn, which holds about 7 of 10 years, shows a seasonal max price from planting to early emergence. A similar pattern holds for all crops, albeit with less consistency than corn. The takeaway; the seasonal pattern suggests higher prices approaching late April and into May. If you historically market a portion of your crop around this time, consider holding off a bit longer this year. The risk, of course, being a continued decrease in price with no recovery.
2020 Corn Price and 5 Year Cash Index for Corn North of the Canadian
In the mean time, keep up with current grain and wheat marketing reports from Dr. Mark Welch here, and cotton marketing reports from Dr. John Robinson here.
Fertilizer
First, inputs. Finding ways to lower inputs lowers break even cost, so even in a low price environment the likelihood of profit is higher. There are a few inputs that are priced advantageously for producers right now, or that will get more expensive with time. Phosphorous, as a fertilizer component, will be important in the near future. The price of Diammonium Phosphate (P) at the gulf has increased 8% on average for the last tow months. Why? China is a major producer and exporter of P as a fertilizer component. While prices are still at a relative low, purchasing fertilizer now could save a few cents and lower your break even compared to delaying purchases until closer to planting.
US Diammonium Phosphate Spot Price (Gulf), 3/13/2020
Source: https://ycharts.com/indicators/us_diammonium_phosphate_spot_price_gulf
Natural Gas
Second, if you have not already priced Natural Gas (LNG) for irrigation, now is the time to do so. Excluding market impacts of COVID-19 illnesses, seasonal indices point to LNG purchases now. NYMEX May ’20 Natural Gas futures rose about 10% over the last week. May LNG seasonal indices show that price tends to fall through late February and rebound approaching planting. The seasonal indices for June through August look the same. If LNG powers your irrigation, now is the time to do one of two things. Forward contract your purchase directly with your supplier or purchase a futures contract against your physical purchases. The risk of forward contracting physical purchases is the possibility of overbuying and not needing as much as you originally thought, or missing out on a lower price in the future. The risk of purchasing a futures contract is loss on that contract, although your physical purchases will be cheaper in the future.
May Natural Gas (NYMEX) Seasonal Patterns (1991-2017)
Source: Moore Research Center, Inc.
Crude Oil WTI Apr ’20 (CLJ20), 3/13/2020 @ 1 PM
Source: https://www.barchart.com/futures/quotes/CLJ20/interactive-chart
Livestock
Feeder Calves & Forage
The nearby CME Feeder Cattle contract lost 9% from Monday to Friday. Local cash prices followed suit. The Tulia-Dalhart-Amarillo average price for 6-7 weights fell from $1.4/lb. to $1.28/lb. and 7-8 weights fell from $133/lb. to $119/lb. Now is the time to know your costs. While heavier calves incur per pound discounts, grazing and supplementing forage through this low price environment might be a profitable solution. Weigh the cost of a current sale (6.5 cwt sold for $837/head) against the cost of grazing and providing hay. The risk of lower prices in the future does exist. However, if you have good pasture available waiting to visit the sale barn might be the appropriate strategy for a week or two. In the meantime, read Dr. David Anderson’s overview of current market conditions in Feedstuff’s, “Fed cattle prices down amid coronavirus, volatile futures market“.
Forages are approaching their seasonal high. The price for local coastal Bermuda grass is in the range of $155-$165/round bale. The 2013-2017 index suggests an increase approaching $180/round bale, and with the 9% drop in feeder prices over the last week that price could increase as more people try to hold on to calves. The U.S. Drought Monitor indicates no drought in the High Plains and moisture is in the forecast for the next week. Again, weigh the cost of continuing to graze and supplement against lost revenue from low prices.
Hay Price and Historic Index
Source: Graphic produced internally with data from https://www.ams.usda.gov/market-news/hay-reports
U.S. Drought Monitor for Texas, March 13, 2020
Source: https://droughtmonitor.unl.edu/CurrentMap/StateDroughtMonitor.aspx?TX
All Producers
Fuel
Fuel is also priced advantageously for both crop and livestock producers. If you have access to on-farm storage for diesel or gasoline, consider purchasing for the planting season. The nearby West Texas Intermediate (WTI) contract fell almost 5% in the last week. The same contract fell almost 50% between January 1 and now. Again, there are two options. Purchase part of your necessary fuel directly if you have on farm storage now, or purchase a futures contract against your later physical purchases. The risk of buying and storing fuel now is the possibility of overbuying and not needing as much as you originally thought, or of missing out on a lower price in the future. The risk of purchasing a futures contract is loss on that contract, although your physical purchases will correspondingly be cheaper in the future.
Interest Rate
Another important input for both crop and livestock producers is their interest rate. Many don’t think of interest rates as an input, but there is no dispute that they are. Interest rates are the price of money that is borrowed; they impact every aspect of an enterprise making them incredibly important. The Federal Reserve (Fed) enacted an emergency ‘rate cut’ on March 3. The Federal Funds rate dropped to 1.25%. The result is ‘cheap money’. The current environment doesn’t inspire incurring a lot of new debt, but it might be time to consider refinancing old debt. All eight of the previous emergency rate cuts by the Fed were followed by an additional rate cut at the following Fed meeting. Interest rates are not going to increase in the next month or two. The best move now is to wait until after the next Fed meeting (March 16-17), then consider refinancing debt if it is profitable.
Federal Funds Rate, 2015-2020
Source: https://fred.stlouisfed.org/series/FEDFUNDS
The market is trading on rumor as it always does. The last few years introduced the agricultural sector to volatility that others are now becoming acquainted with. Now is not the time to deviate from the marketing plan. Prepare, and make smart financial moves to cut costs and increase returns wherever possible.
Chart Challenge
Last weeks chart had the word ‘bale’ included, which was the clue that we were talking about cotton. The big question was, what cotton statistic were we actually discussing? The answer; total production.
U.S. Cotton Production by County
This week’s chart challenge has to do with consumer spending. Good luck!
