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For Ag Markets, It’s All Weather, Corn Analyst Says

Forward sold, buy call options, analyst says.

The direction for grain prices is now resting solely on the shoulders of weather. Weather has historically been the most dominant factor in price direction. It creates an environment of a potential large supply shift in any given year.
In recent years, both corn and soybeans have experienced high yields. Consequently, supply has been adequate to meet demand, and leaves prices stuck at low levels. Fast forward to this spring, and a historic planting delay has the market on fire. Volatility has kicked in, and done so dramatically. Technical traders noted bullish key reversals in the corn and wheat markets on May 13, and have been shedding short positions. Managed money was short the market at record levels moving into spring. Now, caught on the wrong side market, they are exiting in a dramatic fashion.
Shocks in supply have such a big impact because they move the market dramatically, and in short periods of time. They are perceptive in nature, at least initially, until reality kicks in. This is a big point when looking at prevent-plant acres this year in corn. (Prevent plant refers to acres that farmers may choose not to plant due to adverse conditions. Crop insurance defines deadline dates to qualify as prevent plant.)
As of May 27, 39 million acres of corn have yet to be planted. This is historic. As of this writing, prevent plant could be anywhere from 1 million acres up to 10 million acres. The perception is that most of this crop will get planted, especially if corn futures continue to move upward. Rising prices entice farmers to plant, even though it is later than they feel comfortable. Late planting, however, will likely result in a yield loss compared with earlier-planted corn. By some accounts, it is estimated that yield loss is a bushel a day after a planting date of June 1. Some argue that yield loss could be as much as .5 to 1 bushel a day after May 15. Whether it is prevent plant or yield drag, the perception is we’ll see a drawdown in production, and ultimately smaller carryout.
Viewing the markets another way is to measure volatility (price movement). December corn futures, as of this writing, have rallied from a low of $3.63¾ to a high of $4.54 on May 29, well over 90¢. This is a bigger range than we’ve seen in the previous two years. Is the market just getting started, or are prices peaking? From a producer’s perspective, taking prevent plant is not the option of choice, yet it may have a large impact on marketing decisions moving forward.
If you are forward sold and need to cover bushels, we encourage you to consider purchasing call options in case prices skyrocket this summer on less-than-ideal weather. If planting has gone well, you have made your initial sales and are afraid to make more, and you want a price floor, consider purchasing put options. Puts give you the right to sell futures (hedge), without the obligation.
The key is to be ready and prepared. A balanced approach of cash sales along with calls and puts will go a long way in a volatile market. This combination can help you secure a good price while helping to eliminate the emotion that comes along with extreme market moves.
If you have any questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext. 129. Ask for Bryan Doherty.
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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