Are We Already Losing Corn Acres?
It is likely producers will switch some of their corn acres to other crops, unless December corn futures rally above $4.50. This switch would probably go from corn to beans. At current new crop corn prices (near $4.10 December futures), we expect a reduction of three to four million acres. Is that problematic for corn price or supply?Ending stocks are roughly 1.9 billion bushels. This is an adequate number and suggests that the market is not ready to ration supply. But, when looking at both the U.S. and world stocks and stocks usage figures, it doesn't take a vivid imagination to believe corn prices have rally potential in the year ahead. Moving into mid-January, grain prices have been on the defensive, but this is not unusual in bigger crop years as farmer selling usually picks up after January 1.
Yet, when stepping back and looking at the big picture, corn is not priced high enough for new crop to encourage producers to add corn acres and, in fact, suggests less acres of corn. Therefore, with carryout near 1.9 billion and the likelihood of a three to four million acre decrease in production, carryout could move toward a billion bushels or less, depending on yield scenarios.
If planted acres were to drop from 88.6 to 84.6 million and yield drop to 164 bushels per acre, this could suggest a carryout near 770 million, or a stocks usage of 5.5%. The current stocks usage figure is at 13.8%. The lowest stocks usage figure since 2008 is 8.6%.
In essence, we've determined that corn has the ability to rally should acreage and yield be reduced from 2014. This isn't rocket science; it is a matter of shifting a few numbers. The most impactful factor affecting price is weather. Should weather be anything less than ideal, outlooks will change in a hurry.
Right now, the market is stuck in a trading range. That too could change quickly. To assume little or no rally potential for price could be a huge mistake.
What should your strategy be? Our bias is to purchase call options in the late fall and winter months so that, if corn prices rally into the winter or any time beyond, you can become an aggressive seller. The likeliest scenario is December corn peaking in a range of $4.25 to $4.75. Place price orders to sell incrementally in this range. Stay with the mindset that prices can recover significantly in the year ahead, and if you market responsibly, you'll be selling rallies when prices are strengthening and covering these sales with call options.
Yet, if you cover those sales, you'll be in a position to make yourself mostly whole should the market continue to move upward. Buy puts when prices rally. By having a balance of cash sales, calls to cover cash sales, and puts on grain that you do not intend to forward sell, you are now in a position to be balanced and prepared for whatever way prices move.
If you have questions or comments, or would like help implementing strategy for the year ahead or desire materials that you can read to learn more about marketing, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.
These strategies may not be for everyone. In any strategy, consider commission costs on transactions, and make sure you understand the ramifications whenever you are in any market position.
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