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315357

If prices keep falling, farmers are urged to lock in a floor, analyst says

Selling in a declining market is not much fun.

The corn and soybean markets have had a tumultuous last three months. A significant rally in both was followed by a sell-off, then a recovery to challenge highs and then, another sell-off.

Each of these moves has been more than the markets have rallied or dropped in over five years. Corn futures peaked on May 7, rallying more than $1 in three weeks. Dry conditions affected the second crop corn in Brazil, otherwise known as safrinha crop. This was on top of a rally of more than $1 since fall. Just as quickly, December futures lost $1.38 on good U.S. planting progress. They then rallied sharply for the second time, with futures peaking at $1.28, as dry weather in the U.S. became a growing concern.

Soybeans saw a similar pattern, yet held together better on strong demand. Soybean oil continued to race into new highs, as world vegetable supplies dwindled.

Wheat prices rallied sharply, then sold off, and have since been trading more in a sideways pattern. The current focus is on the spring wheat crop conditions, which remain generally poor.

All this volatility can become exhausting, leading one to believe there is no real way to figure out markets and, therefore, perhaps the best thing to do is nothing.  While understandable, this can be an expensive perspective.

When December corn futures rallied and traded above $5.50, it was a price that hadn’t been seen in seven years. When prices peaked at $6.38, this was even better, and farmers who did not sell at $5.50 were happy. Yet, in a very short time, prices dropped from $6.38 to $5.00.

Regrets grew; you should have sold more, or at least made the sales at $5.50 on the way up or down, let alone $6.00. When prices hit $5.50 on the way down, there was disappointment because prices were coming from a higher level.

Selling in a declining market is not much fun, as you likely concentrate on the missed opportunity of higher prices. Fast forward another couple of weeks, and we saw corn prices rally again, peaking at $6.28 on June 10. Again, farmers were glad if they did not sell at $5.50.

As of this writing, futures have dropped well below $5.50, with disappointment and regret again sinking in. Those waiting for the “big” move higher may have nothing sold. Perhaps the important thing to note now is that it is late June, and the window of opportunity could be closing. The latest rally was predicated primarily on dry weather. Now it looks as though a very large portion of the Midwest could see copious rains this week and perhaps early next. Often, happiness or disappointment in marketing occurs from where prices have been and where they appear to be going. Everything is relative.

The purpose of this Perspective is to point out that emotion and how we as humans feel about things becomes a very significant factor when making decisions. Our bias is to encourage farmers to get away from making emotional decisions and instead become strategic.

If selling $5.50 corn on the way up was a good place to be, then selling at $5.50 on the way down should be a good place as well – it’s the same price. If you know you should have sold on the way up and did not due to fear of being wrong, then this is where you should become strategic. Perhaps making the sale you wanted and investing in a call option with fixed risk is a good approach. Buying puts establishes a price floor without the obligation to make delivery. This can be a challenge for producers, as they may feel they are writing a check and may not see that money again. Keep in mind the function of a put. If prices drop, having a price floor can help to shift risk.

Farmers like to be right in the marketplace. Who would not? In reality, there is only one top and one bottom price. It is likely that all decisions to sell will occur somewhere between the two. The key is creating a balanced approach and using all marketing tools available at your disposal, which include cash elevator contracts, put options, call options, and futures. Understanding the right tool to be used at the right time for your marketing decisions makes it easier to execute strategy when prices are moving up or down. Learn about them, consult a professional, and become aware of the risks and rewards of any tool before entering a position.
 
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-334-9779, extension 300.


Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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