Pressure on Old-Crop Corn Price
1/21/2009
Not only has fuel demand fallen, but ethanol price is 75¢ over that of regular unleaded gas, pointed out Bill Biedermann of Allendale at the Top Producer Young Farmer Seminar. “With ethanol more expensive, blenders have no incentive to use any more than mandated, and consumers are less likely to choose E85 at the pump,” he reminded the audience. (See graph.)
Not only that, but investors might seek to buy low (crude and/or heating oil) and sell high (ethanol). “There is no ethanol futures contract, however, so what do you think they would sell?” Biedermann asked. The answer: “Corn.”
Finally, he added: “Investors like romance—something with cocktail party glitz. There is none of that in ethanol right now.”
As a result, Biedermann sees crude trading between $30 and $80/barrel this year and corn, $3.80 to $4.30. However, he cautioned, “there is downside risk to $2.50. On the upside, weather worries could carry us to $5 to $5.30/bu.”
He recommended getting 80% sold on old crop quickly, and certainly before March 31. “If you want to retain ownership, buy $4.20 December 2009 call options for a 60¢ premium. If that’s too expensive for you, lower the cost by selling $6.20 calls for 20¢ income.” You can lower the cost still more by selling $3.30 puts. “If prices fall you would go long in the futures market, but at a lower price.”
