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Feed Buyers Should Shift Risk, Analyst Says

Price setbacks offer end users opportunity.

A drop in commodity prices, including corn and soybeans this past week, is providing an opportunity for end users to shift risk in front of the critical growing season.

Both markets had been trending upward with December corn reaching a high of 4.29½ on May 24 before slipping to under 4.00. This pullback in front of summer weather could be a good time for end users to shift risk for summer and fall needs with the use of call options. Soybean meal prices on July futures peaked on May 2 at 406.50 per ton.

The recent pullback now has meal trading closer to 365.0, or a change in value near 10%. The same argument for soymeal holds as it does for corn; a pullback moving into the early part of June could be viewed as an opportunity for feed buyers to shift risk.

If corn prices were substantially higher and prices peaked in late May, you might argue that a downward trend could continue all the way into harvest. While that is possible this year, it is not likely. We do not see farmers aggressively selling corn on price setbacks until late July or August when they have strong confidence their crop is on the road to maturity and high yield.

With better pricing opportunities already this year, we believe farmers have been more aggressively selling early this season. Therefore, the need to sell into weakness is diminished. More importantly, however, is that all the weather uncertainty (and production uncertainty) with this year’s crop lies ahead yet. If you are betting on sub-4.00 corn as a high price, keep in mind that world supplies of corn continue to slide. The world supply of corn divided by the usage of corn is now at its second lowest level in 24 years. This will be the second year in a row in which world demand exceeds expected production.

Whether corn or soymeal, the point of this Perspective is to encourage end users to stay alert and stay active shifting risk. By some accounts, the weather market does not really begin until mid-June and likely runs through mid-August. This is the critical window that will tell the story if this year’s crop will be record large or a disappointment. The key for you is to be prepared.

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If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext 129.

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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