Marketing Heartburn

November 29, 2011 05:23 PM

Signals mixed on where prices are headed in 2012

Two key factors are preparing to battle it out in the corn and soybean markets. The resulting volatility will generate pricing opportunities—but it will also create marketing heartburn.

The tug-of-war between bullish and bearish factors, based on prospects of another drought in 2012 and a global recession, could last through late winter. "The corn market could be down 50¢ one day and up 75¢ the next," says Chad Hart, an ag eco-nomist at Iowa State University.

Hart suggests farmers use futures prices or put options for downside protection. A $6.50 put is not cheap; it comes with a premium price tag of 50¢. With corn production costs in Iowa of $4.30 to $4.40 per bushel, that’s still a pretty good profit margin, though, he says.

Hart’s advice is similar for soybeans. "A $12 put for 65¢ with production costs of $10 to $11 offers a good return," he says.

He anticipates bean futures prices to be about $12.20 near the end of the year.

Marketing Heartburn

Repeat Drought. 2012 corn and soybean prices are sure to be affected if the drought in Texas, Oklahoma and Kansas continues to wreak havoc on the wheat crop. "A short wheat crop means wheat is not fed to livestock and wheat hoarding will take place globally," says Corinne Alexander, an ag economist at Purdue University. "That would result in higher wheat prices, as well as higher corn and soybean prices next year."

Global Influence. The tenuous nature of the U.S. and world economies and the mood of the investment community will impact pricing opportunities in the year ahead.

"From a fundamental standpoint, the market is strong," says Frayne Olson, an ag economist
at North Dakota State University. With a stocks-to-use ratio in the low 5% to 6% range, grains and oilseeds are sensitive to shocks, bullish as well as bearish ones.

Corn Belt Basis. As is typical in marketing, basis levels come into play as well. In the eastern Corn Belt, the combination of a short crop and strong demand from ethanol plants has created a basis of up to 20¢ higher than board prices. Meanwhile, in the western Corn Belt, higher yields have spurred a basis 40¢ under board prices, Alexander says.

As a result, it might make sense for eastern Corn Belt producers to sell by the end of the year, while western Corn Belt producers might want to store their crops and wait for basis to improve.
For 2012 corn, Alexander suggests obtaining price protection on 25% to 50% in March through May because that’s when the market offers its highest prices. For example, from April 1 through May of 2011, corn futures were above $6.50. "Farmers should think about pricing new crop early. They can still lock in a large profit," Alexander adds.



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