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In A “Wild West” Market, Analysts Discuss Next Moves

July 31, 2012
money gamble

Volatility is the name of the game right now. Here’s what you need to know to maximize this situation.

Volatility in corn and soybean prices, coupled with the big unknowns of final crop yields and federal market supports, has conspired to create tremendous uncertainty in agricultural markets. With virtually every farmer turned into a speculator, what’s the next best move?

Three market analysts discussed these topics and more as part of a U.S. Farm Report marketing roundtable at the 2012 Farm Journal Soybean College in Coldwater, Mich. (You can see the roundtable this weekend on U.S. Farm Report.) The audience asked for a deeper understanding of what’s driving volatility in today’s market.

"It’s like a Wild West standoff," says Mike North, senior risk management advisor for First Capitol Ag, noting that trading volumes vary dramatically from day to day. Soybean prices dropped $1 last week, and then recovered most of the loss. "Everyone is waiting for the other guy to make the next move."

You can view volatility with fear or as an opportunity, says Brian Basting of Advanced Trading in Bloomington, Ill., who prefers the latter view. "The key thing is to have your plan in place so you are prepared for the market to go lower, and you can benefit if it goes higher."

How do you do that? North and Basting agree it’s a good time to buy a put option, locking in today’s relatively high prices. "I wouldn’t wait for the market to produce $9 corn," North says. "$8.15 is still very good, a put option is a great option."

Mike Florez, of Florez Trading, begs to differ. "Nobody in this room is smart enough to figure out where the top is," said Florez, who is betting that corn futures will rise to $9, based on historic precedents.

"No selling until there’s a 10% break in prices," Florez advises. "Then there will be a rally back, and you sell into the rally."

If the analysts were bullish about the direction of prices, they list several factors that will limit demand going forward. North notes that the destruction of cow herds is up 12% this year. Basting says that we could see a "catastrophic liquidation" of cow herds and chickens due to the high cost of feeding them.

"We’re creating an environment for higher beef prices going forward for at least two to three years," North says. That could in turn bloat corn and soybean inventory, depressing long-term prices for beans and corn, he says.

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RELATED TOPICS: Corn College, Soybean College

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