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How high is high?

Agriculture.com Staff 10/20/2006 @ 9:15am

Even the most bullish analysts are surprised at the speed of the rally in the corn market. This year's crop was hardly a failure, coming in at the second largest in history.

Sharp price increases in the face of such a large harvest are difficult to understand for most of us on the farm. Even with last summer's prolonged heat and dryness, my yields were a pleasant surprise. That makes me even more nervous holding unpriced grain.

Just three weeks ago, when I sent out my October newsletter, I told readers that we might need to hold unpriced corn through the winter to take advantage of the potential offered by ethanol demand. At that time, cash corn prices locally were 60-70 cents below today's price. At today's price, I need to rethink my theory!

We need to look back long term to put today's situation in perspective. The price of corn is high in comparison to 2004 and 2005. However, cash corn is still below $3.00 per bushel. That price has been reached numerous times over the last 25 years. The research done for the winning the game workshops shows that $2.80 basis December futures is the threshold above which new crop forward pricing has very high odds of being profitable. Wednesday's close is only 35 cents over that. With the continuing wide basis, the cash offer is not much of a premium.

Similarly, November soybean futures at $6.04, Wednesday's close, is only four cents over the minimum $6.00 price on November futures where forward pricing is unconditionally recommended. November futures have not even reached last summer's high. I hedged new crop beans at $6.27 in June, which was below the summer high. Cash soybeans at $5.40 are not spectacular.

Notwithstanding the above observations, it is hard not to sell some grains after the big rally we have had. Cash flow needs have to be a factor when looking at the total dollars per acre that can be achieved by selling now. To pass up total returns that are the some of the highest in history makes no sense if you have loans that will be due later in the winter.

My target for selling cash soybeans is a dollar a bushel over the September low, or November 15, whichever comes first. With beans in commercial storage, I do not want to pay storage when the current price offers good profit. Determining when to make corn sales is more difficult. My corn is stored in bins I own that have been paid for many years. I keep thinking back to 1995 when I sold out of my corn crop in December at $3.00 per bushel under very similar circumstances. I then sat on the sidelines and watched it go to $5.00.

This week, I bought put options to protect half of my corn that I am storing. The 23 cent premium seems like a big price to pay for protection in a market that has such a good likelihood to go higher. However, with the wide basis and still some carry in the market, I think I will make back the premium even if the cash price stays where it is. If next spring we see commercials scrambling to buy supplies, the basis will take on a completely different look. In the meantime, the premium on the option will limit my risk in a game that could get really crazy, either going up or down.

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