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A balancing act for the markets-Bryan Doherty

05/23/2011 @ 7:14am

The previous Perspective was titled The Last Nail? We discussed the possibility that, with a negative USDA report, the last nail in the coffin for a bullish market may be in place. However, we ended with the idea that we wouldn't be ready to quite pound that nail in yet. There is way too much volatility and potential. Weather will need to be ideal. 

This week we will explore the idea that the corn market has made a very significant and swift turnaround, and that the remaining nails in the coffin are loose and the lid could come off. 

What has changed? The big outflow of money from commodities to elsewhere, a negative technical picture and a negative USDA report all seemed to weigh on futures recently. Last week, however, the market traded legitimate weather concerns such as late planting, continued wet weather in the forecast and cool temperatures, which have limited emergence and growth. In addition, worldwide weather conditions indicate drying conditions in Europe, and now again in Russia. The market is taking notice. Since two weeks ago, corn prices have made an abrupt turnaround and rallied sharply higher on short covering and technical strength. 

We're writing about outlook and in the end, we really want to stress a balancing act. The outlook will be continually changing. With prices at historically high levels, the potential for corn prices (or for that matter, wheat or beans) to lose 10, 20, or even 30 percent of their value is real. It should not be a surprise if a significant corn crop is produced and futures move all the way back down to $4.00, somewhere close to the cost of production. On the other hand, with less-than-ideal weather, the market will likely perceive the need to ration supply and drive prices upward, which could mean a $2.00 rally. Therefore, a balancing act is needed between enough cash sales in an environment where value and opportunity have hardly ever been so strong, yet, great potential for a significant rally. 

So how do you go about balancing? We call it Market Scenario Planning. You simply look ahead and ask four simple questions: What happens if the market goes down a little from here? What happens if the market goes down a lot from here? What happens if the market goes up a little from here? What happens if the market goes up a lot from here? This allows you to lay the ground work for strategic marketing. In most years, being forward sold on corn 25 to 50 percent by the end of May makes sense. It makes sense this year as well. What about the other 50 percent? What if corn prices rally significantly and move to $9.00 or $10.00? Is your unpriced inventory enough, or do you need coverage or partial re-ownership on what's sold? These are all questions that you as a producer should be asking yourself. It's too early to have a definitive bias for prices. Prepare and implement strategies that have you ready for whatever prices do. 

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