Know Your Market
Tilted Market Psychology on Corn Carries Risk for Feed Purchasers
Jan 17, 2014
The risk-reward ratio is 4:1 against feed purchasers right now. This should alert dairy producers to take action on feed.
By Mike Rusch, Stewart-Peterson Inc.
Going into the USDA’s January Crop Report, the market psychology for corn was bearish, and corn prices made a new low prior to the report’s release, down 52% from the 2012 high. With USDA’s cut in yield numbers, corn made a 20-cent rally, its biggest one-day rally in several months. Still, prices are at extremely attractive levels for feed buyers. It is important to examine your feed needs without delay. More than likely, the consequences of inaction will impact your 2014 margins.
The seasonal pattern going forward is pointing to more upside risk for corn than downside risk. Now that we’re through January, the supply side of the equation is firmed up. There will be no more changes to yield, and no changes to acreage for the 2013/2014 crop. What corn does heading into spring will depend on the demand side (which is supported by low prices) and spring weather. We’ll also be keeping an eye on the planting intentions report at the end of March, since we’ve already heard numbers trickling in that corn seed purchases are down relative to beans. All of these uncertain factors support the premise that the amount of additional downside opportunity for corn is greatly outweighed by the potential upside risk.
So, as a dairy producer, if you are thinking that corn may go 20 cents lower and you are waiting to try to grab that, remember that there is a greater risk that corn could go 70 or 80 cents higher. The risk-to-reward ratio is 4:1 slanted against the feed purchaser right now.
Many of the headlines here on agweb.com and elsewhere have talked about "$3.00 corn," and many are asking, "How low can it go?" We’ve even heard of suppliers telling producers they think feed will go down in price, and recommending that producers hold off on purchases. From a risk perspective, feed purchasers should not be sucked into this hype. Everybody and their dog right now is bearish on corn. The psychology of the market is so tilted … to the point where everyone is prepared for lower prices and no one is prepared for prices going higher. And that’s just another reason why this market has more risk to the upside than down, because that is what nobody is prepared for.
The probability of corn going back to $5.00 by June is high. We are not guaranteeing that corn will go back to $5.00. We are simply saying that producers need to consider the possibilities, weigh the risks, and act to protect what you work so hard to earn. Calculate the risk for yourself – the difference between corn going down 20 more cents or up, say, 50 or 80 cents. And think about what you can do to secure these good prices now.
This objective view may make some uncomfortable. There is comfort in following a herd.
As John F. Kennedy once said, and it applies here, "There are risks and costs to action. But they are far less than the long range risks of comfortable inaction."
A good advisor will paint an objective picture and help you use the tools available to you, even if that is outside your comfort zone. Consistent action when opportunities present themselves can help you achieve your long-range business goals.
Mike Rusch is a business development consultant with Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Mike at 800-334-9779, or email him at firstname.lastname@example.org.
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