The start of something big or...
Despite huge crops in 2004 and 2005, the corn and soybean markets have rallied into the early part of winter without any real significant or apparent fundamental cause--at least not on the surface.
Huge and significant world demand, along with growing livestock numbers and ethanol usage, is helping to provide support for corn prices. However, with farmers holding large amounts of free stocks available for sale at any time, the market has probably performed better than expected.
What does it all mean? Is it the start of a significant long-term uptrend in prices, or is it a market that may be ahead of itself anticipating condition concerns for the upcoming year that may not occur? Will prices collapse?
Corn carryout is currently estimated at 2.4 billion bushels and soybeans at over 500 million. Both are the largest numbers in the last decade. Prices are moving higher instead of lower.
Fund buying has been significant. In January, funds were estimated to have bought over 90,000 contracts of corn. Imagine if they had sold 90,000. Why are they buying? It may be anyone's guess, but the underlying thought is that corn is a relatively cheap commodity.
With a generally dry pattern developing in the Southern Plains and the law of averages suggesting that the corn crop this year will probably not be record large, corn may be of good value. On the other hand, if the last decade has proven anything, it is that the corn crop can withstand much weather adversity, and that farmers have been outstanding producers.
Soybeans have found support from dry weather concerns in parts of Argentina and Southern Brazil. However, as of this writing, it is difficult to suggest any substantial yield loss or, for that matter, any direct yield loss at all. Therefore, prices are likely trading anywhere from 50 cents to $1.25 higher than one might think, given significant world and U.S. carryout.
So what should you do? You should market the 2006 crop anticipating normal production. That means the market is beginning to offer opportunities in early 2006 on value. Value is defined as price compared to carryout and history.
December corn futures above $2.50 and below $2.70 is a likely range where prices will peak without weather concerns. Therefore, the market is offering opportunities for farmers to begin making sales. Anywhere from 25% to 50% could be sold in this range for 2006 expected production. If you are concerned about weather, then purchase one or two strike price out-of-the-money call options. Consider puts as well, by buying Dec $2.50 or $2.60 strike prices.
For soybeans, the same holds true. Consider $6.00 plus beans in November a gift at this time, considering a magnificent carryout. Forward sell 25% to 50% of the crop. Consider another 25% to 50% with puts.
If you have questions, comments or would like a strategy designed for your particular operation, please contact us at 1-800-TOP-FARM, ext. 129