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A 2014 corn marketing strategy
As 2014 unfolds, corn prices could drop to under $3.50. If weather takes hold, a rally back toward $6.00 or $7.00 could occur. Carryout has declined the last four months from close to 2 billion bushels to near 1.5 billion, due to higher-than-expected feed usage, good exports, and an excellent crush pace for ethanol. This sets the stage for corn prices to rally. On the other hand, a good crop could send prices significantly lower from the current price of near $4.60 December.
The key for corn producers in 2014 is to remain balanced. December corn futures at $4.60 looks a lot better than potentially $3.50. Therefore, in the winter months, forward sell up to half of your crop. You will also want to purchase call and put options. By doing so, you can cover bushels sold to capture a price rally. You would buy puts to establish a floor to protect the value of bushels not sold.
Typically, prices are at their highest peak in the greatest window of uncertainty. That can be the winter months when the crop has total unknowns in front of it. As an example, we don't know what the weather is going to be like, we don't know how many acres are going to be planted, and we don't know what the world's production or demand will look like. A basic rule of thumb is to assume normal weather until proven otherwise.
A balanced approach is to forward contract 50% of your crop and purchase puts on the other 50%. This will establish a price floor on 100% of your expected crop while leaving 50% open for price rally potential. Purchase call options against forward sales. This now puts you in a situation that, if summer weather takes hold and is less than ideal for crops, you are positioned for price appreciation. In 2012, the market rallied from its low in June to its high in August, a move of over $3. The rally came fast and furious, and if you tried to play catch-up, it was probably difficult. Get call options bought ahead of any potential weather problems such as a late spring or drought. It's too challenging to out-guess the market. Assume normal weather until proven otherwise. Plan now for how you are going to handle a market that could move in either direction with big swings.
If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.
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