Bryan Doherty: At a crossroads
This week, corn futures factored in more concern with weather, pushing the upward envelope of its recent trading range, as December futures reached a high on Thursday of $4.38-3/4. This topped the previous high of $4.38 on April 6. Wet weather, especially in the central and eastern Corn Belt, is continuing to keep the market active on ideas of lower yield potential or a shift away from corn acres. In some cases, we have had farmers tell us there is a high likelihood that some, if not all, of their acreage at this point could be shifted to soybeans.
The implication, of course, is that, if corn acreage is lost, prices could hold. This does not mean the market has to rally, nor does it mean that prices won't drop. Planted crop will have moist soil and the ability to grow in a hurry if temperatures warm up. Once nitrogen kicks in and the crop looks dark green, prices are generally on the slide, regardless of spring concerns. Until June, however, there will be a significant amount of anxiety and uncertainty. From a historical perspective, this uncertainty is viewed initially as an opportunity to price some expected production.
Other than last year when 100-year type floods engulfed the Midwest in late May through June, there has not been a significant drawdown in yield from late-planted crop. History does indicate that, in some years, the propensity for higher yields is diminished, which may already be the case this year. However, those high yields generally are the type of record-breaking yields that occurred in 2004. The market is at a critical crossroads. On the one hand, December corn priced over $4.30 per bushel, with let's say an average basis of 40 cents, leaves the cash market near $3.90. For many producers, cost of production this year may be just under that level. You should start selling.
The corn market has tried but failed in the last three months to move above the upper end of its trading range. If weather takes a turn for the better, the prices could be on a slippery slope. The catalyst to a sell-off may be the lack of expected feed usage. The devastating drop-out in both cash and futures prices in the hog industry due to swine flu suggests no expansionary plans. Dairy prices continue to struggle as well. In the end, the USDA may have to curb feed usage.
Use strategy that makes sense for you. Forward contractors should be at least getting started if not moving into the 25% to 50% sold zone. If you are using futures, consider placing a stop under the market, say, near $4.15. A close below this level triggers a sell. If looking at PUT options, consider December $4.20 PUTS. More aggressive strategy would have you buying a $4.20 PUT and selling a July, September or December CALL option in an attempt to collect premium from time value. Corn futures are at a crossroads. Incorporate a strategy that works for you. Don't have regrets.
If you have questions, comments or would like a strategy for your operation, contact Bryan Doherty at Top Farmer, 1-800-TOP-FARM ext. 129.