Head to Head: Position to Profit

February 25, 2014 08:44 PM

Q: With the bullish February crop report and the global dynamics at play, what percentage of old crop and new crop corn would you suggest farmers book prior to spring and why?

Soybeans Might Have Strength

Brock Schimbeno

Brock Schimbeno     
Senior Broker, Grain Hedge

The Feb. 10 report was bullish for corn and mostly neutral for soybeans.

Corn has been in a bear trend for more than a year, and it’s likely to continue. USDA projects carryout for the coming marketing year in the 2.6-billion-bushel range. With an average growing season, ending stocks will be burdensome, if realized. A prudent marketer would be approaching 90% sold on old crop, with a few bushels left to capture a potential spring or summer rally. For new crop, 50% to 60% sold would be beneficial at this juncture. The bottom line is most of the price potential is to the downside, unless a significant change in production occurs.

Soybeans have also been trending lower. The difference is the margin for error this growing season. Ending stocks are thin for 2013/14, and soybeans need to "buy" acres from corn. South America is harvesting what appears to be a near-record crop. But given Chinese demand, the U.S. still needs a large crop. A producer should be 100% sold on old crop due to the inverse carry in the market and weaker basis in the forward months. Being a little more bullish for new crop, a producer should be 40% sold. This market has the potential to see explosive price action with any production disruptions.

Leave the Upside Open for New Corn

Joe Vaclavik

Joe Vaclavik 
President, Standard Grain Inc.

Don’t make marketing decisions based on USDA reports. News is what the market already knows. USDA data offers a lay of the land but is generally not actionable.

I hope that farmers have a portion of old crop corn sold. There have been plenty of opportunities to capture profitability. There is a limited time window in which old crop corn can be sold, as most will have to clear the bins to make room for new crop. The July futures contract offers the best price for old crop corn; a strategy involving an HTA contract and possible basis appreciation during planting might the best. Call options are cheap if re-ownership is a must. 

I don’t recommend selling new crop corn at a loss. Assuming some on-farm storage and commercial storage, most farmers will not need to sell the 2014 crop until the summer of 2015. Farming is a business. I can’t imagine any other business locking in a loss this early. A put option strategy is the most viable choice for new crop corn. It’s the only way to set a price floor while leaving opportunity to pencil a profit in the 2014/15 marketing year. There is no magic solution that will return the average corn farm to profitability in 2014; however, it’s far too early to take yourself out of the ballgame.

Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.

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