TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
SETTING PRICE SELL TARGETS FOR DECEMBER CORN IN THE YEAR AHEAD
Every year is different, yet from a historical perspective, the corn market has, with hindsight, a somewhat reliable historical pattern over the last five years. In each of the last five years, December corn futures have traded above $4.00 with the high occurring on the December 2019 futures contract at $4.73. Volatility over the last half of a decade has been considerably lower than the previous decade. This is likely more of a function of better farming practices, genetics, and astute farmers. Additionally, world competition has been on the rise as well with Brazil exporting more corn year in and year out.
As harvest winds down and inventory from 2019 disappears, the market will likely grind higher and provide opportunities to sell ahead. The potential lesson learned from 2019 was that having target points above the market has paid dividends as a sustained rally failed to materialize despite a historically late planted corn crop. Weather, however, will still be the dominant feature in crop production and we can’t take for granted that timeliness in the growing season will always be the norm. Setting points above the market has made good fiscal sense, it will also suggest coverage.
A very simplistic approach is to set targets based off of December 2020 futures starting at $4.05 selling 10% and selling 10% each dime higher. If December 2020 corn were to reach $4.50, this would have you forward selling/hedge-to-arriving 50%. When markets rally, emotions rise with prices and the temptation is to cancel sell orders. In order to be disciplined to maintain sell orders above the market and sell regardless of potential outlook outcomes, purchase call options when volatility is low. This is typically in the December through January window. We suggest buying at least one strike price, if not many more strike prices, out-of-the-money. Keep in mind the function of this option is to instill discipline to be a forward seller without question and to cover these bushels should further weather developments, or something else, drive prices much higher than has been witnessed the last five years.
If you have questions or comments, 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.