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Get ready for volatile grain markets

In the 30-plus years that I have traded corn and soybean futures, I have never seen such bullish and bearish price potential at the same time. It will take a disciplined approach to make the right grain marketing decisions for your farm. Before you get busy planting this spring, write out your plan. Be sure to consider the bullish and bearish factors that could drive prices up or down.

4 Bullish Factors

Very low-ending stocks of both corn and soybeans. A lot of this is priced into the futures market with old-crop prices at a huge inverse to new-crop prices. Be ready. When the grain markets put in a high, both old-crop and new-crop futures will drop lower.

Record-low corn inventories held by farmers. Again, a lot of this news is priced into the corn market, with the old-crop futures at a huge premium to the new-crop futures. Several ethanol plants have already shut down, and I would not be surprised by this spring that many more will close temporarily. All of the ethanol plants don’t have to shut down. If just 20% of the ethanol crush capacity is shut down, the ending stocks of corn can jump by 200 to 300 million bushels, and the old crop inverse will crash.

Continuing drought in the western Corn Belt and southern Plains. The continuing drought in these areas may eventually rally new-crop futures to higher price levels. You should be ready to sell that rally. Too many farmers will hold off on selling until too late this year, expecting a repeat of 2012.

Active Chinese buying on every setback in the soybean and soybean meal market. The Chinese have been huge and active buyers from the U.S., because the U.S. is the only store in the world with any soybeans and meal to sell. This has changed. Large supplies are available from South America, and they are available at a lower price.

4 Bearish Factors

Here are four bearish factors that could take prices sharply lower by the fall harvest in 2013.

A record soybean crop and near record corn crop in South America in 2013. In 2012, South America had a major drought; this year, they have a huge crop. In 2013, U.S. farmers face a lot more competition from South America, as improved weather has helped Brazil replace the U.S. as the largest soybean producer in the world. Brazil will also have a large corn crop in 2013, which is being offered at a discounted price.

A large increase in corn and soybean planted acreage in the U.S. in 2013. I am expecting 2 million acres more corn and 2 million acres more soybeans to be planted in 2013. If normal weather returns or if there are just a few timely rains in July and August, this can create increased supplies at a time when demand is starting to slow.

The potential for a 15 billion bushel corn crop if U.S. farmers plant 100 million acres of corn in 2013. A 15 billion-bushel corn crop will be a challenge for the U.S grain industry to handle. Expect a harvest low and basis levels moving out to higher levels than in the last two years. This sets up a great buying opportunity, but it also makes getting part of your crop sold ahead more important than ever.

Increased global supplies as farmers around the world plant more wheat, feed grain, and oilseed acres. Not only are U.S. farmers increasing row-crop acres, but also farmers in Latin America, Africa, the Ukraine, and throughout the world are planting more row crops. With surging global crop acres, you will face more export competition than ever in 2013. I envision scenarios where corn will go to $9 and then drop to $5 per bushel. Soybeans could rally to $18 and then drop to $12. The only thing I am sure of is that we will have some extreme volatility this spring and summer. Traders will focus on every USDA Crop Progress Report and every National Weather Service 6 to 10-day and 11 to 15-day forecasts.

Harness that volatility

Here are three suggestions on how to harness that volatility.

  1. Be an incremental seller. Make a series of 10% sales into the market as it rallies. Last year, that allowed me to make new-crop corn hedges at $6.20, $7.20, and $8.20. That helped me stay disciplined, and I came out with a good average.

  2. Use all of your marketing alternatives. Consider placing some hedges in your own account, using some hedge-to-arrive contracts, and using some put options. Holding your own hedges can create some margin calls, but it does give you a lot of flexibility. By using a combination of hedges and puts, you can get downside protection on 80% to 100% of your crop without making a delivery commitment if you run into production problems.

  3. Plan to spend time on your marketing. If you are only willing to work on your marketing plan or to meet with your marketing team when it rains or on the weekends, you will miss out on a lot of opportunities. You are not just growing crops – you are growing revenue. That means taking time on even the busiest days to stay informed. The best time to do that is first thing in the morning, before you take off for the shop or the field.

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