Energy prices skyrocket

This fall, after harvesting was done, a long-time customer from Iowa called me up and told me he was working on his budget for next year.

“My break-even point for corn jumped to $ 5.00 a bushel,” he said. “Is it higher than most of your customers? ”

Every day I study and calculate the price of grain and energy. After the April 2020 lows of COVID-19, I saw the grain markets – and the price of crude oil, gasoline, natural gas and ethanol – rise sharply. I was amazed at how positive the margins on ethanol have remained as corn has gone from $ 3.50 a bushel to over $ 7.00 a bushel. For many days and weeks, ethanol prices rose faster than the corn market.

However, I have become increasingly concerned that the sharp rise in crude oil and natural gas prices will increase fuel and fertilizer costs in 2022.

When I looked at the large rebate of December 2022 corn from December 2021 corn, and the rebate of new crop wheat futures, I saw that grain margins would be tight in 2022.

29044_crude oil

In the monthly continuation chart of nearby crude oil futures (black) and corn futures (red), you can see the close correlation between crude oil and corn prices. When rallying higher in 2008, crude oil rallied earlier and further than the corn market. In 2012 and 2020-2021, corn futures prices rose further and faster than the crude oil market. We recommended to buy 2022 fuel and fertilizer in August 2021 and at the same time covered 20% of the corn of the new crop. Fertilizer prices were at very high historical price levels, but the corn / fertilizer ratio was working.

When I make recommendations on marketing the new crop grain, I don’t try to get the upper hand.

Instead, I view new crop coverage as a spreadsheet decision. Can we lock in the inputs and cover the crop in advance to get a profit? Both actions must be taken at the same time.

When I made input recommendations to lock in fuel and fertilizer (as I did in early August for the 2022 crop), I also made hedge recommendations for up to 20% of the crop. 2022 – corn, soybeans and wheat.

I didn’t expect the global fertilizer price to come down, and the weekly crude oil chart seemed to be heading over $ 80 a barrel.

How to manage your marketing in this new more expensive environment? Here are three suggestions:

1. Work closely with your suppliers.

The agricultural retailers that sell fuel, fertilizer, and your other inputs all operate at tight margins in a very competitive market. Try to take a long-term team approach. If you can work with your retailers to buy the right product at the right time and get it to the right place, you greatly increase your chances of making the right decisions.

2. Meet with property owners to show them your margins.

Show them that the 2022 new crop corn, soybeans and wheat are trading at a much lower price than where grain markets rallied last summer. Chances are you’ll pay more rent next year. Try to set up a flexible lease that pays a set amount per acre plus, if your total income exceeds a certain amount, a percentage of that income goes to the landowner.

Again, think of this as a team effort. Try to create a win-win deal.

3. When making pricing decisions for new crops, use all available marketing alternatives.

Last year, farmers who used a combination of hedges and put options fared better than farmers who only used spot contracts or hedges. The puts became worthless, but the loss on the put was minimal compared to the increased value of your new crop corn and soybeans.

What is the game plan for the balance of your 2021 crop and the coverage of part of the 2022 crop?

I am a seasonal seller with additional cash sales expected between May and July 2022. I would consider sales in February and March if a weather alert develops in South America and prices rise to 5% to 10% of highs from 2021.

Remember, March is a critical month of trend change. If prices go up in March, this is usually a good time to sell. If corn and soybean prices correct until March, this is a good time to buy.

Right now, the weather forecast for South America suggests a trend line or a better harvest. There is a good chance that I will have cash sales and new harvests between May and July.


The monthly continuation chart for nearby natural gas futures (in black) and CBOT wheat (in red) shows a strong (but not perfect) correlation over the past 16 years. The natural gas and wheat markets peaked in 2008 and fell in early 2012. Both hit significant COVID-19 lows in April 2020. From there, wheat prices rose further and further. faster than the natural gas market. In August, we recommended purchasing your 2022 fuel and fertilizer. Fertilizer prices were high, but the number of bushels of new crop wheat it took to pay for fuel and fertilizer was at a historic good ratio.

Here are four key weeks that I’ll be looking at next year:

  • Week ending May 13

  • Week ending May 27

  • Week ending June 24

  • Week ending July 8

These are important weeks of trend change. If the corn and soybean markets recover during these weeks and the news is bullish, stay disciplined and do a series of spot sales. For the 2022 new crop sales, these are key weeks where I will be doing a series of 10% hedges. I will also be buying put options.

Note: The risk of loss in futures and / or options trading is substantial, and every investor and / or trader should consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical testing of strategies, is no guarantee of future results. Trading advice reflects good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice given will result in profitable transactions.

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