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It's all about planting progress, weather

04/13/2012 @ 2:10pm

The April 10 Supply and Demand report contained some surprises, namely a lack of reduction in U.S. corn carryout compared to expectations, as well as supportive reductions in world carryout for corn, beans and wheat. Beyond that, the report was termed mostly neutral and really didn't provide the market with much fanfare. For now, that means the market will focus on planting progress and weather.

Generally dry and warm conditions have allowed farmers to get a good start in the South, and this has permeated rapidly in the North. For many, the biggest problem they faced this spring was to avoid giving into the temptation to plant too soon. Insurance early plant dates have arrived and now farmers have a green light to move forward. Expect the majority of the crop to be planted soon unless it turns wet.

In most years planting delays are overrated. However, in recent years that hasn't been the case, as massive flooding in 2008 (and then again last year) slowed planting progress and contributed to abandoned acres. A year ago, heavy rains deep through May pushed planting progress behind schedule in the eastern Corn Belt. This year looks much different. As the old saying goes, "plant in the dust and your bins will bust."

As weather goes, so will prices this year. This month's USDA report confirmed that the world is tight on bean and corn supplies. This means any weather that is considered less than ideal will quickly be viewed as a potential supply disruption.

Supply disruptions are the fastest market movers. Demand generally grows or wanes over time. Supply disruptions are something that can happen within a matter of weeks, sometimes minutes, such as on a USDA report. As an example, last year in March an earthquake in Japan created a quick downturn for prices. The market was anticipating that supplies could grow due to uncertainty and concerns were of a usage slowdown. The largest supply disruption the market could face in the months ahead is likely to be weather related.

For now the most pressing weather concern is the general dry pattern that much of the Midwest has endured this winter. Yield potential could move into the mid-160s for corn if there are timely rains. This could possibly drop the corn price down to $4.00. Even the slightest perception that yield figures could be under 160, and the sky could be the limit for prices. In a bullish scenario, the world may run to the U.S. to gobble up old crop inventories and buy new crop. Users of corn will likely cover needs as quickly as they can and speculative interest will be fast and furious. Lastly, farmer selling will slow, and in turn this all fuels the fire of a bull market.

You need to be prepared to manage both higher and lower prices. Do this through the use of put options and forward selling to guard against lower prices. Cover forward sales with call options. For those desiring a more advanced option ownership strategy, consider selling at-the-money December calls and buying multiple out-of-the-money calls. This way, if prices rally you are highly leveraged. This allows you to more aggressively sell cash grain into a rally.

Here's the bottom line: Be prepared for strong market moves up or down. Weather will determine potential production swings of billions of bushels for this year's corn crop.

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