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Ray Grabanski: Cotton top showing the way?

Cotton prices finally appear to have blown their top off Friday, moving limit up for the second day in a row, and then moving limit down the same day to finish with huge losses.  Since then it has been downhill from there, with cotton making a high of $211 on Friday, only to drop to a low of $180, or a drop of $31 or about 15%.  That's enough to consider this a potential top in the cotton market.

The corn, wheat, and soybean markets followed the cotton lower Tuesday, with a limit down move that jolted the grain markets, especially since grains didn't see the blow off top action that cotton did, with a more gradual push higher that kept the uptrend in place, but didn't really blow prices to new highs in an accelerated uptrend (as in cotton).  But grains tumbled anyway, with little to no news other than the cotton price action to blame for the price decline.  Funds seem to be unloading long positions of grains and soft markets, with large price declines of both.  

While corn prices have remained closer to old highs (a low of $6.66 and high of $7.12 for slightly over a 6% decline), the soybeans and wheat have seen larger price drops into this week, with soybeans down nearly $1.50 from their highs (about 10%), indicating a potential top may have been formed in soybeans as well as cotton.  Soybeans have another fundamental working against the bull market recently, and that was the improving South American weather that has pushed prices lower recently.  

Some are not only increasing the Brazilian yields due to the excellent weather they experienced this season (so much for an El Nino impact there!), but they are also increasing the Argentine crop estimates due to the turnaround in weather during February - just in time to salvage a decent crop for Argentina as well.  That is a big surprise, and with Brazilian soybean yields coming in better than expected (now about 15% harvested), that is putting pressure on the soybean market.  

Wheat has seen price action similar to soybeans, with prices pushing near $8.92 two weeks ago for the high, and now prices formed a low yesterday of $7.46 for a total of $1.46 decline or over 16% in just two weeks!!!  That is also price action that could be indicative of a market top.  So we have two of the three major grains with potential price tops in price action. 

That makes for an interesting situation as far as farmer decisions this spring.  While prices are declining, we still have a great need to allocate a short corn crop out over the remainder of this year, and also to entice growers to grow more crops on more land, and to pump lots of money into that production to ensure maximum production.  This is needed to ensure that grains supplies will be more than adequate next year.  Yet, funds are unloading grains at a historic clip.  

What's a farmer to do???  With crop insurance prices being formed now in February (which might turn out to the year's highs), the solution might be simple, and one which will have the benefit of 2-3 weeks hindsight - a rarety in the marketing world.  But since insurance revenue price protection is based on the AVERAGE of the February price traded for grains, this insurance price election might be very high for most crops (averaging around $6 corn thus far, $13.50 soybeans, and $9.99 HRS wheat).  

Producers have the opportunity to buy as high as 85% price coverage for optional units/enterprise yields on their own crops, and 90% GRIP for the average county yields.  Currently, a $5.40 corn put (90% of $6) costs 46c, while a $5.10 put (85% of $6) costs 34c.  For a 150 bu yield crop, the value of the put for corn at the 90% GRIP value is $69, while the value of a 85% put (the $5.10) is $51.  The value of these puts for 

most grains is going to be more than the cost of the insurance!  And producers have the extra benefit of watching prices until March 15 to make their final decision.  If prices continue to drop into March 15, perhaps the smartest thing to do is buy 90% GRIP or 85% enterprise RP for the value of the puts.  And the crop insurance coverage for yields will be a cheap bonus!  

Sometimes, you just have to take what the market will give you.  Well, in 2011, even if you don't take from the market what it gave you, perhaps you will get a second chance via crop insurance???  If you miss the market top in pricing your grain, IF the market top turns out to be Feb. 22, then perhaps buying price insurance protection on March 15 might turn out to be the easiest decision you will ever make!  


Ray Grabanski is President of Progressive Ag, a marketing and risk management firm for farmers located in Fargo, ND.  For questions or comments, or if you are interested in more information about Progressive Ag services, call 1-800-450-1404. 

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