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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.


In the meantime, producers around the world are likely to ramp up production. "At these high prices, we’ll see acres put into production everywhere," says North, who says this is especially true in South America.


Florez is interested in knowing what’s going to prevent the market from going higher. What about gas, tractor, fertilizer prices? He predicts prices will stay high for a long time, with food shortages around the world possible.


Basting agrees: "It’s a serious situation. We need bushels in the U.S., South America and the former Soviet Union."



The analysts agree that demand from China should remain strong, though producers in other countries might step in to meet demand. Basting says that production in Brazil and Argentina next year could be phenomenal. China "seems like a growth market to me," according to Florez.
An audience member at the U.S. Farm Report taping asked: What percent of our crop should he have sold for fall?


"As a company, we’re 60% sold right now," says North, who recently sold some stock to take advantage of recent high prices. However, some are afraid to commit to a cash sale for fear of being able to make good on delivery. "That’s what makes the put option a very viable option," he says, adding that it also protects against crop insurance.


What about the future, 2013 and 2014 crops? Basting advises farmers to be as flexible as possible. "Sometimes your best opportunities appear long before you get out in the field and plant your crop," he says.


"I wouldn’t be afraid to sell some ‘13 now," North says, adding that he wouldn’t sell the whole crop, and he wouldn’t sell ‘14 at this point, either.

 

See full coverage of this week's Corn College events at www.FarmJournalCornCollege.com.
 
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Thank you to the 2012 Soybean College sponsors:

BASF, Great Plains, MANA, Novazymes, SFP, USB 

 


 

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RELATED TOPICS: Corn College, Soybean College

 
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