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Before USDA, sell up to half of new crop, analyst says
As the much anticipated quarterly Stocks and Acreage report draws near, producers should consider balancing both old and new crop inventory through the use of marketing tools. One such approach is selling and defending. What does this mean? In essence, you are selling cash grain and retaining ownership with fixed risk call options, or you are selling futures and covering this position with call options.
In four of the last seven years, corn futures have traded limit after the release of the reports. In two of these years, the market traded limit higher and in two years, the market traded limit lower. In soybeans, the minimum move on May futures after the report has been 30 cents the past six years. Therefore, holding significant old crop inventory, or having no new crop sales in place, could be dangerous. One only has to remember back to last year when corn futures lost over $1.00 in three days.
For both corn and beans, there is a tendency for prices to bottom in fall and rally into the mid-winter months, then begin a slide into the late spring and early summer. If weather is conducive, prices could fall from now until the fall harvest season. Prior to the Stocks and Acreage report, we recommend being somewhere between 25 and 50% sold in new crop. Cover another 25 to 50% by purchasing puts. As for old crop, be 50% or more sold. If you are light on sales, we suggest you make sales prior to the report. The key to good marketing can often be found in a strategic balance. Utilizing the right marketing tools, along with cash sales, often can help alleviate concerns over big market moves and allow for steady cash flow and peace of mind.
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.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.