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Corn below $6 not seen

01/20/2012 @ 2:56pm

Prior to last week's USDA January Supply and Demand report, corn prices rallied 70 cents on weather developments in the southern Hemisphere and pre-report estimates anticipating tightening inventory. With the report showing carryout remaining mostly unchanged, prices wasted little time dropping 50 to 70 cents, creating heavy liquidation and pressuring prices, changing bullish momentum to bearish.

Cash basis has remained strong all fall. Yet, from month-to-month the corn market has had virtually no positive news. USDA reports and more competition from increasing world supplies of feed wheat are viewed as bearish. The corn market has been bucking strong head winds on its attempt to rally. Bulls will hang their hat on the idea that despite a host of negative news, the corn market is unlikely to go below $6.00 any time soon. So far, they are right.

As the spring approaches and anxiety begins to grow, it's likely that corn prices will recover and provide better selling opportunities for producers. Yet, you have to acknowledge the fact that prices are in a downtrend. The most recent price rally in early January failed to take out the highs in November. Prices are experiencing a series of lower highs and lower lows, the definition of a downtrend. Therefore, if you are a corn producer make sure that you recognize that corn prices from a historical perspective are high. Above $6.50 and demand begins to suffer.

However, there is potential for a price rally. Potential is a word that is often used and is probably overrated. Yet, historically tight carryout and the need for a big crop would suggest that any aberration from ideal weather and prices could react rapidly and perhaps violently. Therefore, create a balance as you move into the planting and growing season. Make sure to reward rallies from this point forward with additional cash sales of both old and new crop. Look for opportunities for 2013 crop. Yet, be prepared to defend these positions. Purchasing out of the money call options could prove to be a lifesaver should less than ideal weather occur. 

For now it will take a tail wind rather than a head wind to push prices a lot higher. It's probably best to assume normal weather and market on rallies. Buy puts this winter on bushels you intend to grow and don't want to forward contract. Defend sales and create a balance between sales and re-ownership. 

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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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