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Stage Set For A Significant Price Rally, Analyst Says

Production uncertainty is at a very high level.

Even the most experienced farmer will probably tell you he has never seen a spring like 2019, with widespread rainfall limiting fieldwork and planting progress.

On top of that, a wet October and November 2018 kept many from completing fall fieldwork, further compounding spring accomplishments. One-third was yet to be planted after June 2, compared to the five-year average of 4%. This year is packed with a heightened level of production uncertainty that will keep growers and buyers alert and on edge.
 
Farmers are racing against the clock, and it is likely that many corn acres (if not most) will be planted in less-than-ideal soil conditions. Lower yield potential and prevent plant acres set the stage for significant price volatility, perhaps not seen since the drought in 2012. From a producer’s perspective, there are many angles that need to be viewed and discussed. This Perspective will address price potentials and the need to proactively manage volatility.

An important backdrop to this year’s potential price movement is realizing that this year's spring, by many accounts, is a disaster. The stage is set for a significant price recovery beyond the recent rally. In most years, wet springs prove to be selling opportunities. If weather cooperates during the growing season, prices have a tendency to move lower. Expect the unexpected - the crop does much better than anticipated and prices retreat.
 
If you’re a seller of corn, consider buying puts on price recoveries and defend against lower prices. If you have already aggressively sold, or are in an accumulator-type contract where sales can double, you need to make sure and have this position covered. Consider purchasing call options to protect at least the double-up portion of this position. In 2012, corn prices rallied more than $3 per bushel in less than 60 days. Once momentum builds and prices are skyrocketing, it is difficult to jump into the market. Plan and prepare ahead of time. We believe the handwriting is on the wall, and no one should be surprised if prices move higher.
 
If you're a buyer of corn, now is the time to be decisive and take action. Prices have rallied off their lows. By many accounts, however, the lows established this winter were nearly disingenuous. Speculative money went massively short at a record pace, pushing prices too low in early May. In the early to mid-winter months, December futures were trading near $4. We saw a rally of near 40 cents in recent sessions on historic flooding. This could suggest that prices have a significant move ahead if corn supplies need to be rationed. Consider booking as much inventory as you can. If you cannot buy the physical ahead, purchase call options. Call options give you the right, not the obligation, to own futures.
 
Volatility has picked up more in the last month than in the last five years. Expect this to continue, as the market tries to factor in many changing variables, including prevent plant acres, weather, politics, and demand. All have contributed to the recent price movement. If they align to one direction, expect prices to radically change. Are you ready? Take time to prepare, and you won’t be caught off guard.
 
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If you have comments or questions, contact Top Farmer at 800-TOP-FARMER extension 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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