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Sell Corn and Defend, Analyst Says

05/02/2014 @ 1:35pm

Corn prices have continued to edge higher but have failed to make a significant push much beyond the $5.10 area on December new-crop corn. As for old crop, July's recent high of $5.21 is impressive, considering on January 10 this contract bottomed at $4.28-1/4. As prices move higher, it is easier to become friendly to prices, expecting even higher rally potential. 


A number of events have occurred for positive price activity the last four months. Good demand on all three fronts (ethanol, feed usage, and exports) have helped push prices higher, as has support from firmer outside markets (particularly soybeans and wheat). Yet, responsible marketing rewards rallies. But what if prices continue higher?


It may be easier to be friendly to corn prices now than it was in January, yet much of the positive news is already in the market. One marketing strategy that you could implement now is selling expected production for 2014 and defending. Recognize that carryout (both domestically and worldwide), while smaller than it was just months ago, is still termed adequate. It is early enough in the season that, despite a less-than-ideal start to the planting season, we can't portray weather as a major concern for this year's crops, at least not yet. If a large crop is feasible, this likely means downside risk for corn prices of maybe a dollar or more.


How do you defend? One way is to make cash sales and then reinvest a portion of these cash sales by purchasing call options. Often we hear producers say that buying calls could be throwing money out the window. Why not just make the sale? One only has to look back at 2007 when volatility erupted. As weather goes, so will price direction. It might be good to assume normal weather, thus the sales. Yet, be prepared if weather, still the biggest unknown variable to affect crop production, diminishes crop prospects. Don't try to outguess how high or low prices could go. Put effort into managing volatility through strategy rather than guessing the outlook.


Currently, prices are high enough to reward, but still almost $3.50 lower than where they peaked in August 2012. Human nature might suggest if you make cash sales now and prices rally, you will feel as though you made a mistake. Instead of rewarding higher prices, you may tend to hold off, worried you could be making another mistake. If you purchase calls against forward sales and prices do rally, it is likely you will have the confidence to sell additional crop. In the end, it boils down to managing opportunities and risk, rather than letting the volatility of the market manage you.

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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 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.

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