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Three corn market scenarios

02/17/2012 @ 1:39pm

In this perspective, we will look at three different scenarios for the corn market this year. 

We will look at what could drive prices significantly higher, and then the after affects if this were to occur. Second, we'll look at more of a sideways to neutral pattern, and third at a crash in prices. It's likely that, with tight carryout, one of these three scenarios will occur. It may even be more probable that two or all three could occur. Our goal is to draw an argument that you need to be prepared for wild price activity in the year ahead.

Corn acres are expected to rise in 2012, with most estimates now between 94 and 95 million acres. If corn yield were to increase from last year's 147 bushels an acre to somewhere close to 164, corn prices could go on the defensive and see a sharp sell-off deep into the late summer season. This could push prices all the way down to $4.00 or less for December futures. Charts are indicating the very long-term development of a head-and-shoulders pattern which provides for a downside objective near $4.00. In order to prepare for this, by the end of spring you may want to be forward contracted  anywhere from 30 to 50 percent of expected production and cover the remaining 50 or 70 percent with bought put options. The put option will establish a price floor. The goal is for you to have shifted your risk on 100 percent of your expected production should prices see a sharp sell-off into the fall of 2012. Even with lower prices, the good news is you will be protected with your strategy. Demand will grow with lower prices, which will be a long-term benefit to corn producers.

On the other hand, even if acres increase, record tight world and U.S. inventories have set the stage for a significant rally as supply disruptions occur due to weather. Corn futures may waste little time rallying to $8.00 or even $10.00. We would not expect prices to stay high for long, as it will choke demand. Yet, should weather problems affect crop development, a rationing of supply will occur. As prices rally, they will likely uncover 'buy' stop orders, as well as create a speculative buying frenzy. This, along with a rush by end users to cover needs, would add another element of bullishness. Should this type of rally occur, you as a producer will want to be primed to take advantage of historically high prices. Do this through the use of call options bought against forward sales. Be prepared to make additional cash sales at higher levels. Or, more importantly, be ready to buy put options which will establish a price floor and leave the topside open. Once prices have peaked and start moving down, a rapid sell-off is likely, and the only way to really take advantage of that is to have either sold on the way up or purchase puts. Often, when a market peaks and starts to move lower, the downturn is so quick and furious that it is hard to make decisions to sell, let alone make enough sales to make a big difference.

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