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What you don't want to hear

Agriculture.com Staff 03/17/2006 @ 12:07pm

The corn market has moved higher throughout the first quarter of 2006, posting a somewhat surprising recovery from harvest lows.

The nearby May futures contract bottomed in December at $2.12-1/2 and recently topped on March 3 at $2.40, or a 27-1/2 cent recovery. Not bad, considering carryout increased from the year before.

Massive piles of corn were scattered throughout the Midwest. With an upturn in prices, optimism has grown in the winter months that increases in ethanol, feed and exports could suggest a significant rally if weather becomes a concern. We do not disagree. However, what nobody seems to be talking about, or for that matter wants to hear, is what happens if there is another large crop, say, close to 12 billion bushels.

The corn market has witnessed significant fund buying this winter, especially in February and early March, in which well over 100,000 contracts have been purchased. This may artificially boost prices in the face of fundamentals, which suggests no strong argument for a price rally, or at least not from current prices. The market may be primed for a rally if there is a supply disruption, yet at the same time, corn prices are more likely to make a big downturn if funds exit.

Favorable attitudes can turn negative in a hurry and, unfortunately, the nature of markets is to quickly erode and fall apart at a more rapid pace than they rallied. Corn prices have been trending higher for nearly three months, yet could fall apart in three weeks.

We continue to talk to farmers and read publications which emphasize growing demand. At the same time, both seem to ignore the reality that the last two years have produced record crops. There seems to be growing belief that another large crop isn't likely. Farmers should assume normal or above normal production and should market as such. If you didn't think you were going to produce a good crop, why even pull the planter out of your shed? If crop conditions are ideal, expect close to 12 billion bushels.

You as a producer need to guard against down price potential, just as you need to be prepared for a weather market and sky-rocketing prices. You have to balance your outlook with strategy. Use current price levels as opportunities to get 30% to 50% forward sold on 2006. Cover the remaining expected production with at-the-money PUT options. Why not have a price floor on all of your expected production? Consider covering forward sales with one or two strike price out-of-the-money CALLS. Now you are positioned for whichever way the market goes. If a big crop scenario repeats itself for a third straight year, you will be well prepared.

If you have questions or comments, please contact Top Farmer at 1-800- TOP-FARM, ext. 129.

The corn market has moved higher throughout the first quarter of 2006, posting a somewhat surprising recovery from harvest lows.

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