It has been a long way down from the August 2012 corn and soybean highs. Although the situation is uncomfortable, the fact that yields are coming in above expectations is helping producers’ bottom line. If producers bought a high level of crop insurance, it is also providing some economic stability.
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Lead month corn has major resistance at $4.62. To break above this level, we will need corn yields to end up below expectations, a loss of more acres than expected and demand that exceeds expectations. The tie breaker will be the weather we have next summer.
If we have trend line yields, we could see stocks explode and prices drop like a rock. If demand recovers a little, corn acres are below 92 million and yields fall to 2012 levels, then the sky is the limit. These two options have many producers completely confused. In this predicament, farmers often put their hands in their pockets and wait. While waiting did eventually result in good gains from 2002 through 2012, many are wondering if the commodity cycle has turned negative or
if the global economy will even be strong enough to pay for the grain.
Battle lines are being drawn by bulls and bears, and the tug of war will last well into next summer. This will frustrate trend followers but be welcomed by option put and call sellers.
For those who have unpriced grain in the bin, your options are limited. Use a solid price bounce into December to price July corn as close to $5 as possible. An alternative is to sell out-of-the-money calls at the preferred strike price for inventory on a short-term overbought situation. The advantage is ensuring enough premium to at least pay for storage and give a return on the risk.
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Higher-than-expected yields and the Chinese buying spree is putting a backbone in the soybean complex. Upside potential depends on the South American crop. If it continues to look strong, lead month soybeans won’t move much past $13.50. I’m concerned about the November 2014 soybean outlook. If corn prices drag while farmers are signing up for crop insurance, they might switch to soybeans.
Strategy: Dump soybeans before we get too far into the South American crop season. Then price 2014 soybeans, starting at $12.50. If prices are not established and we see higher acres and solid yields, prices could fall below the cost of production next fall.
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Wheat has experienced a solid price recovery; demand has improved in the midst of global production concerns. Focus on selling expected 2014 production. The wheat market is approaching what I perceive as the bottom of the price range. Price at least 50% between $7 and $7.50 by buying deep-in-the-money puts. The objective is to get a cap that has most of the positive features of a short futures contract or cash sale position and limited time value cost. Don’t be short cash or futures until closer to March. It’s time to take advantage of current rallies, so make scale-up sales on strength; use a deep-in-the-money put to cap cash flow exposure.
Bob Utterback writes from New Richmond, Ind.
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