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Corn Farmers Feel Missed Marketing Opportunity, Analyst Says

Setting target points can help.

On the surface, USDA’s July 11 monthly Supply and Demand report was considered slightly negative for corn.

Futures moved lower in reaction, yet quickly reversed direction and finished higher. The next day, futures continued to climb higher, and reached $4.60¾ – near the contract high of $4.73. When trade resumed Sunday night, prices peaked at $4.64¾ and then began to slide.

For nearly the next three weeks, prices slid. On August 1, they hit $3.97¼. Uncertain growing conditions (including a cool, wet spring and late planting) and less-than-ideal weather meant little to the market. Producers were caught off guard at the magnitude of the drop. The price drop could have been for any number of reasons that may have end users back away, including margin call long liquidation, trade concerns, and prospects for improved weather. Whatever the reasons, the drop in price was larger than expected and frustrating to producers, who are now experiencing that uneasiness of missed opportunity.
Marketing carries some attachment of emotion, no matter how long you’ve done it. For some, this never goes away, it’s heightened every year, and often leads to marketing decisions that are later regretted. The last weather market of consequence was 2012, when corn futures rallied from near $5.00 a bushel to well over $8.00 in less than 60 days. This year, it looked as though the market may have had a similar setup, with a third of the crop planted after June 2. Yet, December futures tried to rally on three occasions, each time rallying above $4.50, only to fail. Plans to sell above $5.00, the highest value in five years, vanished.
How do you avoid the pitfalls of selling too much too soon, and not enough? One of the keys is setting target points. For the first 25% to 50% of expected production, setting targets above the markets generally provides producers with the comfort of selling price rallies. The fear or concern of selling too much too soon is still real. The key is setting targets and having call options purchased. Call options provide the discipline to make cash sales, regardless of a friendly price outlook. Weather outlooks often change. When they do, prices move quickly. If prices move higher, your cash sales may seem too low, and your call option is poised to increase in value.
We are in a challenging growing year. We empathize with producers who were reluctant to make sales at higher prices because their crop condition was too uncertain. By having targets to sell above the market, sales could have been made. Producers who were hesitant to sell ahead could use put options. Puts give the owner the right (not the obligation) to be a seller in futures. Puts are often referred to as insurance against lower prices. A combination of cash targets, calls, and puts can make for a balanced marketing strategy. You can alleviate the stress of trying to outguess the next weather forecast, crop report, political development, or some other event that isn’t even considered at this time.

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