"TIGER" Marketing: $5 Corn, $3 corn or both?
Grains rallied once again to new highs in corn and soybeans this week, pushing into the $4.20 area for Dec corn and well over $8 now for soybeans. It's still the ethanol plant construction at unsustainable rates that makes the grain markets so exciting.
USDA is projecting a 50% increase in processing capacity for ethanol (1.05 billion bu) for the 2007 crop year, a huge construction program in just one year. This new demand is just too much for the market to absorb in one year, and creates the need for an unprecedented rally in 2007. This already began at harvest 2006, and so far has continued to this point.
It may be naive to think the rally will end in February, as usually markets with this type of need to ration demand/provide incentives to plant in the coming year continue into planting. It may very well remain the case in 2007 as we need to ensure some type of carryout comfort in the coming year for corn. The attractive corn price is also driving all other markets higher as well.
Could we see $5 corn yet this spring? This is certainly a possibility, and Pro Ag leans toward the probability of both $5 corn this spring, and even sub-$3 corn by this fall if the market does its full job this spring/summer. We need to first ensure the rapid acreage expansion of corn needed this spring (will $5 corn do it???), and then with a good harvest prices could retreat sharply to punish those that didn't price it on the big spring rally (which enticed the corn acreage in the first place). Of course, the predictability of this type of market is not strong, with weather playing a large part yet this year. But both $5 and $3 corn are possible this year, and it's also possible we will see both by harvest (in fact, the market probably needs to do both to really do its job this year).
This creates some huge opportunity for aggressive growers, especially given the $4 Feb. price almost assured for the crop insurance revenue guarantee. Growers can use this Feb. price to lock in risk protecting revenue guarantees, thus eliminating most of the risk in producing the 2007 crop. Then with most of the risk gone, this will allow farmers to hold off on pricing additional crop until we rise well above the Feb. price guarantee (which we think is most likely at planting time). At that point, locking in near $5 corn might be too good an opportunity to pass up. If the market does its job (rallying enough into planting), we should get the necessary acreage which will allow prices to drift much lower into harvest (with a good crop yield). At that point, 80% CRC/RA or 90% GRIP may trigger claims on almost all crops (unless a huge bumper crop is produced) if prices drift below $3 at harvest. This could be a huge windfall gain for producers, collecting $5 for the 2007 corn crop AND collecting crop insurance indemnities if prices drift below $3 - a true ''double dip''.
TIGER MARKETING PLAN
Note the plan stated above includes using revenue insurance to HOLD OFF on winter sales, not pricing grain until near the end of the spring rally. While most insurance agents (with little market savvy) are advising pricing grain early using revenue insurance (the call side of the revenue protection), instead until spring Pro Ag would advise using the put side of the revenue insurance to hold off on pricing until we exceed the Feb. price guarantee by some amount (10%, 20%, or 30%) so that we can participate in whatever spring rally occurs. This would use all the market opportunities present, but would take an aggressive marketing style to pull it off. This "profit push" marketing program is for tigers, not little lambs, as the market will likely be full of treachery yet this spring. We will take some risk into planting, but in reality most of the risk is already protected by the revenue insurance protection bought at high levels. We see this as the ''true'' marketing opportunity, but it does take some price risk into the traditional spring market topping area.