Prices Have Rallied. Now What?
The old saying is, “be careful what you wish for.” If you wished for a price rally, suddenly it’s here. A steady downtrend for corn, bean, and wheat prices since last fall saw prices quickly reversing, as weather began to affect production. It didn’t take long for end users, speculators, and fund managers to notice. Heavy short covering was noted and technical formations on charts pointed to higher prices. The futures markets didn’t disappoint. From its low near $5.91, December corn recently reached over $6.25 or a recovery of near 23%. November soybeans saw a similar rally, gaining 21.9%. Many producers were behind on new crop sales because of the big discount to front month futures as well as the inversion between cash currently being offered for delivery versus new crop delivery. Now that prices have rallied, the same old question has surfaced: what should be done now, and how much should we sell?
Recognize that in June, dry weather scares may continue to develop or could quickly vanish. If they vanish, poor demand and expectations for big supply could leave commodity row crop prices vulnerable to a sharp drop. Additionally, Brazil has significant inventories of beans and corn, implying the world will focus on cheaper products elsewhere. Therefore, export activity could stay slow until the world “has to” buy from the U.S. On the other hand, drought monitor maps and crop ratings continue to suggest smaller crops. By the third week of June, dry weather is real and potentially impactful. The rationale for both the bull and bear arguments is that prices are poised to drop or rally sharply.
Prepare yourself for strong volatility. Make sales at prices that make sense to your operation. Prepare yourself for future action. Consider covering sales with an ownership strategy that will keep you mostly whole, should prices spiral upward. Consider a strategy to protect unsold bushels. We believe it’s best to be of the mindset that strategy will out-perform outlook. A simple yet powerful approach is to be at least half sold whether it be through forward contracts, hedge-to-arrive, or some type of cash tool that you can deliver and receive a price. On the other half of your expected production, use paper products, perhaps with an emphasis on buying puts to establish a price floor and leave unpriced grain open for future price advance. On sold cash grain, purchase call options or use a call strategy that can keep you being an owner, especially if prices move higher, yet with a quantified risk. Visit with a professional to see if this strategy will work for your operation and your goals.
If the last several years have taught us anything, it is that prices can and do make very significant moves in very short periods of time. This year is no different. Don’t get caught flat-footed. Your second sell opportunity for the season is here. Embrace the volatility and take advantage of it.
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.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
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Bryan Doherty