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Farmers Urged to Wait on Hedge Lifting

When the realization hit that the U.S. corn and soybean crops would both be bin-busters this year, many hedgers took bets on price declines.

Now that both commodities have plunged – corn futures are down 26% and soybeans have fallen 27% this year - some producers may want to buy back those contracts and book profits. But the safe bet is to leave the hedge on until they sell the physical commodity, says Scott Irwin, a professor of economics at the University of Illinois.

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The USDA has pegged corn production at 14 billion bushels on yields of 167.4 bushels an acre, both records, and soybean output at 3.82 billion bushels with yields of 45.4 bushels an acre, also all-time highs. With such lofty crop projections, futures could move lower.

“There probably could be some further price erosion if the early yield reports are true,” said Irwin, who prefers to “keep it simple” and recommends hedgers hang onto their short positions until they sell their grain or soybeans.

Corn futures dropped 26% this year and soybeans fell 27% as near-perfect weather in the U.S. Midwest and Plains boosted crop prospects. As much as two times the normal amount of rain has fallen in parts of the Corn Belt this year, according to the National Weather Service.

Nearly three-fourths of the U.S. corn crop and more than 70% of soybeans were in good or excellent condition, the Department of Agriculture said in a weekly report.

Jeff Kaprelian, the trade desk manager at adviser and broker The Hueber Report in Sycamore, Illinois, says because prices tend to reach seasonal lows in early October, that’s when growers should target buying back short positions.

Normally, lower prices would stimulate demand, but because both crops are forecast to be records, few buyers may come calling this fall, instead waiting for the cost to decline further before making purchases.

The risk is low that prices will rise, and if they do, growers still own the physical commodity, which is what protects them should futures increase.

“Hedges should be left as hedges,” he says. “That is, they aren’t lifted until the commodity is priced.”

If there is price risk, however, it’s to the upside because futures have already fallen so far this year, University of Illinois’ Irwin says.

Cool temperatures in the Midwest, which have helped improve crop prospects through most of the growing season, may start to become a detriment this autumn as any early frost could curb yield, he said.

Geopolitical risks could also cause prices to rise. Any further conflict between Ukraine and Russia, among the world’s biggest grain exporters, may threaten global trade and boost futures.

Another factor, Irwin said, is whether the Environmental Protection Agency will tinker with a rule that sets the amount of corn-based ethanol required to be blended with gasoline.

The mandate currently states that about 14.4 billion gallons of ethanol be mixed into gasoline, but that may fall closer to 13 billion gallons if an EPA proposal comes to fruition. The EPA contends the levels mandated in the 2007 Renewable Fuels Standard are difficult to meet because gasoline consumption, and therefore production, is down.

Still, while producers betting on price declines are protected if futures rise because they own the physical corn and soybeans, some may not want to give back any gains they made owning short positions.

Those who want to keep their short contracts can put a “hedge on a hedge” and purchase calls to protect them should prices rise, says Jason Britt, the president of brokerage Central States Commodities Inc. in Kansas City, Missouri.

“Instead of giving back the profit (from the short position), in the event the market would find a bottom,” hedgers could buy calls, he says. “They’d be out the premium but leave the hedge on longer to make sure prices have bottomed out.”

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