By: Jeremy Barron
We all know the USDA monthly crop production report is the single most important data set in the agriculture business. But for the full picture, we rely on three major USDA reports throughout the year:
- Planting Intentions (March)
- Final Planted Acreage (June)
- Final Production (January)
Putting the pieces together with the data shared in these reports can be tricky. These three individual reports are the puzzle pieces to a full picture. Understanding each can help you better align and prepare your commodity price risk management strategy.
The USDA’s Planting Intentions report in March is the first confirmed estimate the market receives on the upcoming crop year. Until this point, traders look at historical data and projections to estimate a crop size. Since there are so many unknowns, there tends to be opportunity for market moves. And depending on the side of the market you are on, going into spring without a plan can be dangerous.
The USDA’s Final Planted Acreage report in June provides clarity on the season’s planted acres. By this time, we have experienced a planting season in North American corn and soybeans. Most acres have been planted (or were prevented from being planted) and now the market can focus on the yield piece of the puzzle. Due to many unknown factors between the March and June reports, a solid risk management plan is critical.
Let’s say you are a corn and soybean farmer in North America, it’s early June and you’ve just finished planting your crop. There is a lot of speculation about how many acres were planted this spring. You’ve been busy and watching the markets hasn’t been your top priority. However, you suddenly see your crop emerging and thriving. Immediately you begin to think about commodity prices and start to run various “what if” scenarios. But wait, before you know it, corn and soybeans have dropped 30 cents in a matter of days. Do you wait to see if it comes back? Or, do you act on hopes that yields will be strong, knowing the June 29 crop report will be out in a couple weeks?
*Graph compiled by Cargill Risk Management using historical prices from Reuters
This dilemma is all too common at the farm gate. By asking yourself – How do I manage price risk? What tools are available to me? If I could get “X” price, what percentage of my crop would I be willing to market? – You develop a deep understanding of your goals and can begin to formulate your “in-season” marketing plan.
A similar dilemma exists for the commercial commodity consumer. A sudden drop in prices can be a great opportunity to review your risk management plan. By understanding your consumption needs and risk tolerance, you can start to formulate your plan for how you protect prices further out on the curve. A methodology we use is the “DDC” approach to commodity risk management. This approach encourages you to find the right balance of discipline, diversification and control and is the first step to building a framework to managing commodity risk.
If as a producer, you find yourself getting stuck on pricing ‘what if’s’, or if you’re trying to find balance in your commodity risk plan as a consumer, OTCs could be a good option for you. From both perspectives, OTC products can help you obtain desired pricing, giving ultimate control over your plan so that you’re prepared when the unexpected happens.
Then, on June 29th, the USDA Final Planted Acreage report is out. Traders will focus on crop size. The USDA monthly crop production report will once again, take center stage until the final production report is released in January.
Understanding these three, critical pieces to the supply side of the puzzle, combined with a solid commodity risk management plan, can help you set course on another productive, and hopefully profitable year.