Farm Service Agency offices are open again -- hooray! That means anyone who didn't already sign up for and receive their Market Facilitation Program (MFP) payments for 2018's corn, cotton, dairy, hogs, sorghum, soybeans and wheat can now get in on that wave of government money flowing to farmers' mailboxes (or direct deposit accounts).
The market this matters for, of course, is soybeans. Ostensibly, the soybean market is most drastically affected by tariffs during the ongoing U.S./China trade war, and therefore soybean bushels are the most generously reimbursed in the Market Facilitation Program. Farmers who sign up can receive cash revenue equivalent to $1.65 for every bushel of soybeans grown in 2018.
Okay, great. Now how should they treat that cash income as part of their overall soybean marketing plan?
This question matters, not only to individual farmers considering their marketing decisions, but also to the industry as a whole. If, for instance, these cash payments allow farmers to hold on to their low-priced beans and wait for a better price, then there will be implications for the physical ownership and movement of old crop soybean bushels.
This is a time of year when farming operations are typically in need of cash flow, and those needs are typically met by selling some grain. This year, the cash flow from the government may mitigate some of that need and therefore inhibit the physical movement of old crop grain. Farmers may lock their crops away without having to sell for cash.
On the other hand, I've spoken to several farmers who, upon receiving their MFP payment from the government, decided to add that cash into their calculations of 2018's soybean profitability, then came to the conclusion that, "Hey, altogether it's a profitable-enough price. I might as well sell some beans." In this way, the MFP payments may be lubricating the movement of physical soybeans from farmers.
Neither of these approaches is totally rational from an economics perspective. The decision to sell may be rational, and the decision not to sell may be rational, but using the MFP payments as justification for either one isn't rational.
If you lost a $100 bill on the street yesterday, should that affect your decision today about whether you should buy a large or small coffee? No, it should not. But sometimes people think that way: "Ooo, I didn't like losing that money yesterday, so today I'm going to pinch pennies." This is a decision-making bias known as the Sunk Cost Fallacy.
Rationally, your decision about how much coffee you buy today "should" depend only on how much you would enjoy and value that coffee. Similarly, your decision to continue investing in a project should only depend on your future expectations for that project and you should be blind to how much money you've already spent on that project. If new evidence suggests the project will result in loss, then it shouldn't matter how much investment you've sunk into it in the past; you should just abandon the project, no matter how much it hurts to acknowledge the past loss. That's the rational way to approach the economics, but people aren't always rational. The Sunk Cost Fallacy motivates people to throw good money after bad, just because they want so badly to convince themselves that past losses aren't truly "sunk."
These Market Facilitation Payments are kind of the opposite -- let's call this scenario a "Sunk Revenue Fallacy." Rationally, decisions today about marketing old-crop grain should depend only on our expectations for market prices in the future, NOT on whatever revenue may have been received in the past.
DTN's National Soybean Index, an average of cash bids around the country, is currently $8.33 per bushel, bouncing up against the six-month high that it has tested and failed to exceed three times already. So sure, maybe the decision to sell soybeans today could include the accounting of those MFP payments. A farmer (or a farmer's accountant or a farmer's banker), could say: "Selling cash soybeans today at $8.33 feels equivalent to selling cash soybeans at $9.98 (that's $8.33 plus $1.65)." However, the decision-maker should still be weighing that price today against the chances for different prices in the future. If he believes the price will someday go up or down 50 cents, then that's the choice he should be considering -- either sell the equivalent of $9.98 soybeans today or, perhaps, sell the equivalent of $10.48 soybeans someday or, perhaps, sell the equivalent of $9.48 soybeans someday. In every scenario, the farmer still gets the $1.65 per bushel cash payment either way. It's not going away. It's already "sunk" into his bank account. The MFP payment shouldn't -- rationally speaking -- have any effect on the market outlook.
But humans aren't known for being perfectly rational, are they? So, let's assume that at least some farmers are incorporating their $1.65 MFP payment into their soybean marketing decisions. It's likely that some are motivated to sell cash soybeans because of the payments and, simultaneously, some others are motivated to keep storing soybeans. The two phenomena could both be affecting decisions right now and counteracting each other.
Have we observed anything in the market to suggest that MFP payments have altered farmer selling behavior? No, I don't think so. There has been virtually no change in the nearby futures spreads, which reflect commercial traders' outlooks for inventory and the demand for storage space. The March-to-May soybean spread has remained stubbornly flat, around 13 cents per bushel since October. Similarly, soybean basis bids remain in a creepy endless twilight. West of I-29, the region that typically feeds soybeans by rail to the Pacific Northwest export market, posted soybean basis bids remaining stubbornly weak -- anywhere from $1.10 to $1.50 under nearby futures. And it's been that way since before harvest -- nothing has changed.
I'd like to stress that I don't necessarily think it's a bad idea to sell soybeans now, despite the weak basis market. There are many rational reasons to do so, especially if someone is concerned about maintaining the quality of those stored soybeans into the warmer weather of springtime. Ultimately, it may or may not be a good guess to assume that prices will sink lower again in the future, in which case, the prices offered today are a selling opportunity. That outlook, of course, depends on expectations for the U.S./China trade war, and your opinion about that depends on your own personal political expectations. It's not really something that fundamental market analysis can predict.
Whatever a soybean marketer decides to do, the decision should be based on the outlook for prices. Do you foresee better or worse price opportunities in the future? How much could those potentially better price opportunities be offset by quality losses? Decisions based on those outlooks will be good decisions ... just as long as they're not based on the "sunk" revenues of the past.
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at email@example.com or on Twitter @elainekub.
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