Are You Upside Down on Selling?
Sep 03, 2009
I just got back from the Farm Journal Corn College event and speaking at the Farm Progress show. In both cases I observed producers who are more worried about the crop being out there than the trade. Many were wondering why the market was not going up on concern about frost and the lateness of the crop. After talking with them a little more you found out why—they have sold very little of this 2009 crop.
While it’s not a scientific study, I get the strong impression that producers are really upside down on this year’s crop. They have high cost above current cash values even with the bigger potential yields. They did little selling in the 2008 highs for 2009 and have been waiting for a weather event all year to bail them out. Now that we are down at these low levels, they are going to put the crop in the bin and hope for a 2007 or 2008 demand event to bail out of the unsold storage decision.
In the 28 years I’ve been in the market, I don’t quite remember when producers were so uniformly on one side of the boat coming into the fall. They don’t have enough storage space for the crop, they are not sold and the crops not going to be a crop that stores well for a long time.
What’s this all mean? Eventually, producers are going to have to bite the bullet and price the crop. I believe they are going to wait as long as possible. I would suggest this is a mistake. I would be actively looking for opportunities to sell inventory on any price bounce in the December 2009 corn back to $3.30. The only way this is going to happen is if we do get a frost scare in the month of September and beans take off.
As for corn producers who did sell the crop: You have some management decisions coming up. Do you simply liquidate the hedge or roll? I would suggest, if no frost scare of significance develops until the second week of October we are going to have price pressure clear to Thanksgiving. I would focus on rolling the December cash contracts and hedges forward to the July 2010 in this time period. As for long puts, it’s more difficult for me. In fact the cost of time value versus the carry incentive could be almost a scratch. Therefore, I would suggest you liquidate your puts and simply sell the cash and be done with the 2009 crop.
Outside markets: We would like to start alerting clients that we anticipate a secondary high within the first quarter of 2010 in the bond market. This will be the last really good chance to lock in long term rates on the bonds. It’s time to start talking to your advisor at UMS about how to protect interest rates. Additionally, we are watching the natural gas contract for a low so we can lock up and protect long term upside risk in nitrogen cost exposure. You are going to hear me talk a lot about controlling input cost upside long term risk exposure. If we can control our interest cost and fertilizer cost exposure, it will go a long way to helping us sell corn because we have a better handle on the profit margin.
If you need any help in implementing a speculative or hedging strategy give us a call at 1-800-832-1488 or email me at email@example.com
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