Think about it: we’ve just passed the one-year anniversary of $8 corn, and prices are still searching for a low. Throughout the years I’ve observed that in times like this, marketing is not a high priority for many farmers.
Margins are bound to get significantly tighter, so it’s even more critical to plug any holes in your marketing plan.
While the reasons are different, we are following some of the same 2008 price patterns—prices fall from the summer highs to the fall lows. In 2008 it was faster because of the implosion of the global financial markets. We subsequently had a two-year sideways trading range that only broke out to the upside when yield reduction events occurred in 2011 and 2012.
This year, prices are going down because we are seeing persistent demand softness, and it will take time to regain markets that were destroyed by the explosive prices. To top it off, yields appear to be good in the U.S., as well as around the world.
The August supply and demand report was a short-term bullish surprise to the market, which has helped to confirm a near-term low. The September and October reports should help resolve some of the big concerns about exactly how many acres were planted this spring.
Sales Index Key
- Excellent sales opportunity....10
- Excellent buying opportunity....1
During the next six months, I would not be surprised to see a tug of war develop between the bulls and the bears, as neither will be able to force a trending market. Subsequently, I expect range-bound trading until a major weather market resurfaces.
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There are several things producers need to manage right now to plug the holes in their marketing plan.
Long calls: If anyone is holding long calls, they must force themselves to liquidate once we get past the September supply and demand report. Even if the positions are down to modest value, it’s better to take the money off the table than let them expire worthless.
Long puts: Due to the big price break and the possibility of a fall price recovery, if concerns with crop maturity develop, roll down any deep-in-the-money puts. It’s time to move into a limited risk vertical put spread.
Storage: Many pro- ducers have not forward sold most of this year’s production and plan to store it and forget it. Instead of closing the door and forgetting about it, it would be better to:
1) Lock up basis on all off-the-combine cash sales. Sell this inventory around the September supply and demand report. Either the market will rally because of weather influences or retest the lows as bins fill up.
2) Capitalize on full carry. I believe a significant part of the 2013 crop is unsold and will be put in the bin and stored. The risk is that the deferred contracts will fall to the nearby contract price. The end result is the producer will store for nine months, pay all of the storage costs and take it out of the bin at a lower price than when he put it in. If anyone has cash sales on the books and is planning to store, roll all forward contracts forward to the July 2014 contract to capture carry during October or November. If hedges are liquidated, protect the carry incentive being offered.
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- September 2013