Corn Prices at a Crossroads: Keep it Simple
Once June rolls around, all bets are off on crop production estimates, as weather becomes the dominant factor affecting corn’s growth and yield. In recent weeks, dry weather has lifted December corn futures from near $4.90 to just under $5.50. There is plenty of room for prices to move higher, should adverse weather be a factor in the weeks ahead. Yet, poor export sales and competition from Brazil is keeping a lid on rally potential. Corn prices are at a crossroads. They could just be bouncing before they return to resuming their downtrend, or a bigger rally is just getting started. Don’t over-think things.
When referring to simple, there are different scenarios that could send prices up or down. Trying to guess price direction is difficult. Weather predictions more than a few days out are not precise. When adverse weather occurs, currently in much of the Midwest with drought conditions, it is difficult to know what to do. Do you make sales only to experience regret if prices move higher? Or do you hold off only to watch prices drop? Decisions are filled with stress. The key, from a marketing perspective, is to be prepared. Preparation is planning for prices to either move significantly higher on weather events or lower if weather is cooperative.
By early summer, 50% sold ahead is a goal with merit. Protecting the remaining 50% of expected production using puts is warranted, based on the idea that a large crop could cause prices to lose value and drop from the current price of near $5.40 to perhaps $4.50. Between forward selling and put purchases, a floor on 100% of expected production is established. What if prices rally? The production you forward sold cannot gain value. What is protected by the puts, however, is left unpriced and can participate in higher prices. Purchase call options that are out-of-the-money, giving you the right (not obligation) to own corn with futures. These are bought to cover forward sales. You are positioned so that you are prepared whichever way the market moves. Consider using December options, as they will provide plenty of time for the market to factor in a short crop or big production.
The key to this balanced approach is execution. There is no time to waste. Talk to your advisor and execute so you are ready for market movement. Recognize that prices probably will not stay in one area very long. Discuss which options are best suited for your operation and risk tolerance. Using a simple strategy can be powerful. Doing nothing is still a strategy and is the most speculative of all marketing approaches.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
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