Producers need to separate their opinions about the corn market into old crop and new crop. I expect old-crop corn to be extremely reactive to any changes in supply. The chances are better than average that lead-month futures will need to move above the 2008 numbers to ration usage during June and July. At the same time, I expect, the new crop will be reacting to major increases in planted acres, making it difficult to move above $6.25 unless trend-line yields drop below 162 bu. per acre.
Handling old crop and new crop differently requires two separate strategies. Producers have a choice to make: The market has reached a near-term price plateau basis the lead month futures right below $7.50. The recent retreat in prices has producers who are holding inventory in a little distress.
1. The first alternative is to take the price, clean the bin and start on expected 2011 sales. I know that anyone who is holding old-crop inventory wants the March highs back, but right now that will not happen unless Mother Nature gets nasty.
2. A second alternative is to go for the final price event associated with a summer weather event. If producers are right, they will be well rewarded. In case they are wrong, the risk should be prices close to the $6 level.
3. A third alternative is a compromise position: sell inventory now and re-own it in a limited risk call option strategy in the July contract to enable participation in a summer event if it occurs. The best choice depends on each producer’s ability to handle risk—remember, hogs get slaughtered!
Here are my suggestions for handling the corn market:
- Give serious consideration to having more than 100% of an average production priced in the December 2011 corn crop contract between $6.05 and $6.30.
- I assume that most producers bought some basic crop insurance for expected production for the 2011 growing season.
- Give serious consideration to buying some form of upside price protection if December corn starts making new highs in April. I suggest a known-risk, vertical-call strategy.
- Where possible, focus on selling September corn rather than December to deliver against—this will allow you to take advantage of spread premiums and early harvest positive basis bids.
- Once we move into July, consider liquidating call protection when risk of a yield reduction event is over.
In regard to 2012 sales, it is time to be alert and ready to act if there is a summer weather event, but don’t move too soon. I suggest a selling price no lower than $5.50 to $6.25 to sell December 2012 up to 75% of expected inventory in futures rather than forward cash contracts. A selling plan must be flexible when you are considering this form of a sale in a market that is experiencing significant demand growth.
To add to the 2012 selling plan, move the contract forward and backward to optimize the spreads. This is why futures contracts are recommended over cash sales. It will be necessary to have some form of call protection in place this fall for the spring of 2012. One must assume that a seasonal rally (just like this year) will develop from the fall lows to the spring highs. Finally, those in futures will be open the basis. I would not act on 2012 basis sales unless an exceptional event is going to occur and basis narrows to historically tight levels. If that is the case, lock up the basis and remaining short futures.