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Late crops, deviation and volatility

Agriculture.com Staff 09/18/2009 @ 8:19am

Late crops, volatility and deviation are three terms that will affect prices in the weeks ahead. First, the crop is late. This, in turn, leads to potential increases in volatility, as uncertainty throughout the remainder of late summer and early fall increases on weather forecasts for frost. Then, deviation refers to the potential change in final crop estimates as compared to what the August USDA figures estimated.

The 2009 crop year will likely go down as one of the more uncertain throughout this growing season. Not only did the market deal with late planting in large portions of the Midwest, but also a cooler-than-normal summer, as heat units were lacking all the way from North Dakota to Ohio. Yet, one would also have to argue that the weather in late August and the first half of September could not be more ideal. Nonetheless, with much of the corn and bean crops running one to three weeks behind schedule, it could be some time before final yield estimates are actually calculated.

Deviation refers to the amount of differential that could define this year's crop from the August USDA estimate. A 10% deviation infers the potential for significant variation of final crop projection. As an example, if expecting 12.9 billion bushels of corn and the crop varies by 10%, this could mean close to 14 billion or 11 billion bushels. One scenario could send prices down 50 cents or more, while the other could rally prices back into the $4.50 to $5.00 area.

The point of this perspective is to recognize that just about anything can still happen. Have a balanced marketing approach, even though harvest is upon us. There is a general thought that prices cannot rally into harvest. That was proven wrong in 2007, as prices rallied through harvest on the heels of an outstanding crop. Any weather adversity over the next couple of weeks could change the supply picture significantly. End users should buy November corn CALL options to cover feed needs in case of early frost. Those who aggressively forward sold corn or soybeans may want to purchase out-of-the-money CALLS as safety valves in case prices make a significant leap. If you are behind on sales, purchase PUT options to establish a price floor in case weather turns better through the remainder of the growing and harvest season.

If you have questions or comments, contact Bryan Doherty at Top Farmer, 1-800-TOP-FARM extension 129.

Late crops, volatility and deviation are three terms that will affect prices in the weeks ahead. First, the crop is late. This, in turn, leads to potential increases in volatility, as uncertainty throughout the remainder of late summer and early fall increases on weather forecasts for frost. Then, deviation refers to the potential change in final crop estimates as compared to what the August USDA figures estimated.

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