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Head to Head: Next Leg Down

October 30, 2013
By: Guest Editor, Top Producer
 
 

Q:  Given the current environment with corn prices significantly lower than in years past and the outlook, how should farmers plan their marketing strategy?


Focus on Low Option Premiums

Scott Harms

 

Scott Harms
Senior Ag Risk Specialist,
Archer Financial Services Inc.

During the past two months, the corn market has accepted the idea that overall yields are exceeding expectations. This has created a steady downtrend in December futures from late August highs. The lack of news due to the government shutdown, rumored export business and rising world grain values have stabilized the corn market and lead to a short covering bounce.

The absence of USDA’s reports have only delayed the release of the expected higher corn yields until Nov. 8 and likely the next leg down in corn values. This has led to lower option volatility, which is what we should focus on. Currently, we stand at 60% priced for the 2013 and 2014 corn crops.

Farmers who are positioned similarly can purchase December or March corn put options for added protection. With prices moving to new lows, farmers can begin scaling out of more profitable hedge protection and transfer that risk to December or March options that have been purchased. It’s rare for the corn market to set its yearly lows in October, so it is likely that new lows will be forged in the months ahead.

However, with the funds at a near-record short position, I don’t believe corn will fall much below $4.20. In anticipation, 2014 hedgers can look to these same options or place temporary defensive hedges in futures. 


Corn Marketing Strategies for 2014

Alan Brugler

 

Alan Brugler
President,
Brugler Marketing & Management LLC

The year ahead will present major marketing challenges. Faced with burdensome carryover, the market might need to reduce 2014 acres, which requires lower prices. Here are some marketing strategies to consider:

1) On the back slope of a multi-year short crop and long tail market structure, be more aggressive with forward sales.

2) Expect rallies. The 30-year average annual corn futures trading range for the marketing year is $1.41 per bushel. Rallies often top out early with surplus supply.

3) Storage pays. In a surplus year, futures distributes the crop throughout the year. Earn basis gains by setting a deferred price with futures or options.

5) Margins will be thinner. Spend more time and money to improve your marketing.

6) Set probability-based price targets and make incremental sales when they are hit.

7) Make a few forward sales or hedges for 2014 on rallies because of the Recency Effect (tendency of recent experience to color our view of future values).

8) Weather and yield variability is a fact. Put some bushels on reserve or be prepared to buy them back with paper.

9) Price floors with put options protect margins and allow you to take advantage of any surprise bullish moves. Offset time decay by selling out of the money puts or calls.

See Comments

FEATURED IN: Top Producer - November 2013

 
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