The practice of buying commodities on an as-needed basis is termed just-in-time inventories.
This has been the primary method that end users purchasing grains and oilseeds have practiced over the last several years, likely going back to at least 2014. Dependable crops and ample supplies create a lack of urgency on the part of end users and, consequently, they can buy at almost any time at a price that is attractive.
For most of the last seven years, the price of corn, soybeans, and wheat, have been priced near or below the cost of production. In fact, when buying below the cost of production, we would call this a bargain. Another way to view it is that commodities have been on sale for some time. Yet, eventually, low prices cure low prices or events occur to change the trend of price.
A dramatic turnaround over the last several months, in particular for soybeans, have end users regretting just-in-time inventory practices.
There was not one single event that occurred; it was a combination of events that have changed the trajectory of prices. Corn and wheat prices have surged as well. If you were using just the latest news story to make a buying decision, you were likely continuing to buy as needed.
With reflection, it looks like the 2019 crop was overstated in the United States. Adjustments to supply in September, coupled with dry weather and a significant windstorm through Iowa, began the trend of higher prices. A weakening U.S. dollar and strong export activity followed suit. Managed money wasted little time flipping short positions to long, helping to build upward price momentum. This week, prices pushed into new highs and are currently trading at their highest level in seven years.
The just-in-time inventory approach should be abandoned. Or at least, modified. If the trend of price is stable and you are buying as needed, you still need to prepare and mange for the unexpected.
Black Swan events can push prices lower or higher. Good operational management is prepared for such occurrences. We believe the sharp rally in grain and soybeans prices will now encourage end users to be more aggressive in the years ahead and better planners.
In the commodity world, if you are comfortable, you should be aware. The markets are dynamic and constantly changing. When volatility picks up and you are not ready, significant regret and financial strain follow. The key is preparedness. Stay vigilant and strategic, connecting with those who can help guide you to managing risk.
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If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 300.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
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