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.
Is it too early to worry about drought or dry weather conditions? Most meteorologists, as well as most farmers, will probably tell you no. Yet, maps indicating drought conditions in the South suggest dry conditions permeating all the way to the Dakotas. It doesn’t take a lot of imagination to wonder what happens if drought conditions persist. Farmers in those dry regions will certainly tell you it’s on their mind, despite it only being mid-January.
Weather is dominating both Argentina and Brazil crop prospects. Prices have recently responded with positive gains as hot and dry conditions persist. Private estimates are suggesting the Argentine corn crop could be somewhere between 23 and 25 million metric tonnes, compared to the most recent USDA estimate of 29 million. The rally has provided opportunity to price inventory.
Over the last two weeks, corn and soybean prices have moved higher on South American weather concerns. Now is not the time to be complacent.
As 2011 winds down, grain producers are looking ahead and wondering how aggressive they should be selling next year's crop. Over the past year, sales that were made early created disappointment when prices rallied. Many felt they made mistakes. Yet, when bull markets end, they have a tendency to do so quickly, and are sometimes very unforgiving. That has been the case this year. Sales made early serve a key function rewarding value and shifting risk. You should not abandon that approach.
A fence strategy is an option strategy where you can reduce the cost of an option you are buying. The mechanics of a fence strategy are buying a put and selling a call, or buying a call and selling a put, depending on your perspective. Typically, livestock or grain producers will have an interest in buying a put and selling a call in order to protect unpriced inventory (yet to be produced, ready for market or in storage). However, the end user of a commodity, such as feed buyers, would have an interest in buying a call and selling a put.
As winter approaches we take time to reflect on the past year. The year of 2011 certainly had its challenges for many, as adverse weather conditions tested many. Yet, many also experienced record high yields and record high revenue. For all in agriculture, if we step back and pause for a minute, we will likely recognize that we are in one of the the most sought after and desired occupations in the world. For that we give thanks. For those that received high prices and high production, there is extra gratitude.
If you have recently finished harvest, you might have a significant amount of inventory that is unprotected from a price decline. Storage has been a good alternative in recent years. However, the market is currently priced at historically high levels, and with uncertainties in Europe, as well as the potential for large South American crops, prices could come under pressure. Therefore, holding too much unpriced crop could mean big risk.