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Is history relevant?

Agriculture.com Staff 04/18/2008 @ 11:13am

Is History Relevant? I have been studying grain markets for over 30 years. One of the most easily understood conclusions in that time is that April is the month when the yearly high in corn futures is most likely to come.

In soybeans and wheat, the yearly highs are slightly later in early May. If there is going to be a huge weather rally the odds are that it will be in the summer, not in April. Nonetheless, on average April and early May are times to focus on for making sales of corn and beans.

The question that has come up in the last year or two is whether the old price patterns are relevant in this time of extreme prices. No one can say for sure until the opportunities are past. In most years, the seasonal highs are brought on by the trade trying to ensure adequate acreages of the various crops are planted and fears of planting delays caused by wet weather.

The current situation in the grain markets is similar to a typical year except at a much higher price level. It is difficult for a farmer to judge whether or not the prices are in the proper ratio to get the correct balance of the various crops. On the other hand, it is easy for a farmer to see how the weather is affecting planting progress.

I have my planter in the shop for maintenance and minor repairs. By Monday it will be ready to take to the field. In the past 24 hours, it has rained almost two inches at my farm. The soil was already saturated. The odds of getting any corn in the ground in the next few days are very slim. I can plant my few acres in three days, so timeliness is not a big concern. If this weather continues for another three weeks it will certainly be a big concern for most farmers.

Research I have done on my own and in cooperation with the University of Nebraska shows that forward contract or futures sales of new crop corn the first week of April has about 70 percent odds of being at a higher price than harvest time sales. Similar results can be expected for soybean sales made the first week of May. Buying put options during the same time periods lowers the odds by about ten percent. The odds for options are lower because of the premium cost. The advantage of put options is that the top price is left open in the event of a runaway bull market later in the summer.

In the "Winning the Game" workshops, I suggest a strategy of selling the first increment of new crop grain using futures or cash forward contracts on bushels covered by crop insurance. Options are a logical choice for the next increment. The last increment can be left to speculate on a late summer rally or to store into the following spring. The amount done on each increment is a matter of personal preference, based on cash flow needs and risk management issues.

This is a tough time to make decisions on grain marketing. This year is different mostly in the magnitude of the outcomes, either good or bad.

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