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Where from here?

Agriculture.com Staff 07/10/2009 @ 11:53am

The beating the grain markets have taken this week certainly has farmers asking where prices go from here. The psychology of the markets has changed from putting risk premium into the price to account for things that might go wrong, to discounting any possibility of production problems for the rest of the summer. It is hard for me to argue with the latter theory. We had four inch rains, in the past week, here in Cass County. Crops already looked good before these latest rains.

The long term seasonal charts show July as a month when the most probable direction for prices is down. There have been years when grain prices trended higher in July, but those years are unusual. In looking at December corn futures for the last 20 years, I discovered six of the years when futures were higher at the end of the month than at the beginning. The remaining 14 years the price went down or was almost even at the end of the month.

The corn futures market typically drops from the last of June until the middle of September. The soybean futures market usually has a minor rebound from about the middle of August until the September crop report. That move is sort of a final opportunity to make last minute sales before harvest. The situation is not encouraging for those with grain still to sell. My thinking is that old crop grain needs to be priced on any rebound from recent lows. I hear farmers say that they can put new corn on top of old corn in their bins. I would rather sell the old corn and put new money on top of old money. The cost of storage reduces the probability of profit and there is the possibility of spoilage from mixing old and new grain.

For those who made new crop sales, the recent wash out in price has made option premiums more affordable. Buying call options to cover earlier sales is a strategy that has worked well for me many times. There is a lot of summer left and there is plenty of time for production problems to pop up or for demand to rebound. Right now it does not appear that will happen. I would rather spend a dime on an option than to watch a dollar of profit disappear from an unexpected change in trend.

I don't think there is any big hurry to get the option bought. I was away from home two of the past three weeks. The time away gave me an opportunity to see crop condition in other locales. My perception is that the crops in eastern Nebraska are in as good of shape as I have seen in my farming career. I expect that the heat and humidity in the last half of June have helped the crops in the areas I visited catch up. No doubt this was one of the factors taking prices down so hard this month.

The beating the grain markets have taken this week certainly has farmers asking where prices go from here. The psychology of the markets has changed from putting risk premium into the price to account for things that might go wrong, to discounting any possibility of production problems for the rest of the summer. It is hard for me to argue with the latter theory. We had four inch rains, in the past week, here in Cass County. Crops already looked good before these latest rains.

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