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What If Fall Comes Early?

08/22/2014 @ 11:18am

There is one event that could change the fortunes of the corn market in a big way – an early freeze. For many in the northern tier states, a normal freeze could create quality issues as well as reduced yields. 2014 holds big promise of a record corn crop, and this has been reflected in lower prices. However, the crops are not in the bin yet, and an early frost could send prices skyrocketing. End users, as well as those producers who are heavily forward sold or have short corn futures, should now be looking aggressively to cover longer-term needs. We'll take a look at two views on how to do this.

The number of bushels at risk of early frost can be debated, and simple math could argue 1 to 1.5 billion bushels are at risk. End users would be in a position to scramble to cover needs should a frost occur. At the same time, producers would be reluctant sellers. Carryout could drop significantly from close to 2 billion to well under 1 billion. The first strategy is to start aggressively booking corn, assuming that corn prices have little downside risk from here. Despite good rain throughout August and generally favorable weather, prices have remained in a range-bound pattern. The cost of producing corn is higher than the amount farmers are receiving. While prices are low, and your comfort zone as a feed buyer is likely high, now is not the time to sit on your hands and do nothing.

The second strategy, which will allow for prices to depreciate further yet provide upside protection, is to purchase call options. A call option gives the buyer the right to go long futures and not the obligation to do this. You could view this as an insurance policy against higher prices. November calls expire on October 24 and provide ample time for the crop to mature. Should a frost occur early, this option has plenty of time to work in your favor. As of this writing, $4.00 November call options are near 4 cents. We feel this is inexpensive protection against the potential for a major move higher in prices. Yet, should a large crop mature and prices decline further, you may be able to benefit by purchasing corn at lower price levels.

In the end, what we're most concerned about is that those who buy corn could be caught off-guard in a rather abrupt and serious way. The best planning is preplanning so that you are prepared. With corn prices as low as they are, we would much rather encourage corn buyers to be proactive rather than reactive.


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.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.

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