Perspective 1-31-20

TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty


Over the last six growing seasons, the December corn contract (on average) has dropped $1.17 in 72 days. The time it takes for prices to move lower has been weeks and, if missed, a painful financial result for corn producers. Big crops (domestically and worldwide) suggest that once a weather concern for U.S. production is considered past, fund selling, long liquidation, and technical selling “kick in” to further exasperate the drop in prices. End user buying also dries up, as buyers wait for lower prices to find a bottom. What can you do to manage a quick turnaround in prices?

Once a rally begins, recognize that, unless there is a true supply reduction (not perceived), prices can rapidly decline. We see two methods to prepare for an uptrend that quickly turns into a downtrend. One method is to make sure you are taking advantage of the rally. Set target points above the market to incrementally sell. As sales occur, your emotion will likely be tested, as there will be a growing belief prices will continue to move upward. Yet, selling in smaller increments will allow you to plan. That is, if a true weather market is developing, you can cancel additional orders. If the rally is predicated on emotion (futures short covering, news stories exasperating crop stress), then you will want to keep your orders in place. We suggest up to 1/3 of your crop sold on price points. Move this up to 50% if you are covering sales with the purchase of call options.

Another method to make sales is to follow the market with a stop or stops. A stop is an order placed under the current market price to initiate a sale if prices begin to weaken. If futures are in an uptrend, following the market with a stop will allow for prices to continue to appreciate. Placing a stop/stops under the market allows your sell orders to become triggered, should prices begin to weaken. While you are not selling at higher prices as you would with trigger points above the market, you are selling in what might be the beginning of a downtrend. You may look back and see you still sold in the upper echelons of the overall price move higher.

Lastly, when prices rally, buying puts can establish a price floor against bushels you do not intend to forward sell. The combination of put buying on a third to half of expected production, along with cash sales, sets the stage for you to be in an excellent position to shift risk.

Before entering into any strategy, make sure you understand the risks and rewards. Consult a professional to learn more.

If you have questions or want a strategy for you in the year ahead, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.

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.


Carol Tillmann

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