What if fall comes early?

Published on: 11:10AM Sep 04, 2014

Early frost could send corn prices sky-rocketing

Bryan Doherty

By Bryan Doherty, Senior Market Analyst, Stewart-Peterson, Inc.

While feed buyers are happy about relatively low corn prices and the anticipated "bumper crop," there is one event that could change the direction of the corn market in a big way – an early freeze.

If you read the headlines, 2014 holds big promise of a record corn crop, and this has been reflected in lower prices. The crops are not in the bin yet, and looking at the December corn chart, you can see that the market understands the risk between now and harvest. Prices have stabilized and not gone lower as they often do just prior to harvest.

Corn prices have little downside risk right now. For many in the northern tier states, even a normal freeze could create quality issues as well as reduced yields. An early frost could send prices skyrocketing. The number of bushels at risk of early frost can be debated, and simple math could argue that one to one and one-half billion bushels are at risk. End users would need to scramble to cover needs should a frost occur. At the same time, producers of corn would be reluctant sellers. Carryout could drop significantly from close to two billion to well under one billion.

Feed buyers should now be looking aggressively to cover longer-term needs. If you have not been regularly managing the price of your feed, let’s look at two ways you could act now:

  • The first strategy is to start aggressively booking corn, assuming that corn prices have little downside risk from here. Despite good rain throughout August and generally favorable weather, prices have remained in a range-bound pattern. While prices are low, and your comfort zone as a feed buyer is likely high, now is not the time to sit on your hands. The odds of prices staying low are not in your favor.
  • The second strategy, which will allow for prices to depreciate further and yet provide upside protection, is to purchase call options. A call option gives the buyer the right to go long futures and not the obligation to do this. You could view this as an insurance policy against higher prices. November calls expire on October 24 and provide ample time for the crop to mature. Should a frost occur early, this option has plenty of time to work in your favor. As of this writing, $4.00 November call options are near four cents. This is inexpensive protection against the potential for a major move higher in prices. Yet, should a large crop mature and prices decline further, you may be able to benefit by purchasing corn at lower price levels.

In the end, what we're most concerned about is that those who buy corn could be caught off guard in a rather abrupt and serious way. The best planning is pre-planning so that you are prepared. With corn prices as low as they are, we would much rather encourage corn buyers to be proactive rather than reactive.

Planning for "what ifs" is crucial if your margins depend on feed prices in a certain range. Headlines may lull us into thinking prices will remain in a certain range, however, mother nature does not read the news. She will do as she pleases, and we need to be prepared for whatever comes next.

Speaking of preparing for whatever is next, visit Stewart-Peterson at World Dairy Expo, September 30-October 4. We will have "What’s Next" presentations in our tent outside the Exhibition Hall, and you will be able to ask questions about what the markets might do, and how you can prepare. Click HERE for the schedule. See you there!

Bryan Doherty is a senior market analyst for Stewart-Peterson Inc., a commodity price management firm based in West Bend, Wis. You may reach Bryan at 800-334-9779, or email him at [email protected].

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, promoting the use of marketing tools, including futures and options. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Copyright 2014 Stewart-Peterson Inc. All rights reserved.