With virus impact absorbed, market eyes planting weather, analyst says
Now that the March 31 quarterly Grain Stocks and Prospective Plantings reports are history, the grain and soybean markets will focus attention on other factors.
Mainly, that focus will be on weather and continued fallout from the coronavirus. Weather conditions will likely be the dominant price determinant for row crops in the weeks and months ahead, as the planting and growing season is upon the Northern Hemisphere. The effects of coronavirus have devastated markets around the world over the last six weeks.
However, most of the impact of the virus has likely already been absorbed, as commodity prices (notably agriculture and energy) have suffered significant losses, many in the 15% to 25% range. At some point, harvest-type low prices for crops could be viewed by end users as too good to pass up. Once the emotion of the unknown is behind the markets, expect prices to rebound.
The optimistic view is that markets are currently overdoing it to the downside. Fast forward 90 days from now, and we believe futures will be moving higher as uncertainty with production increases, demand picks up, and energy prices are on the rebound. The world will need to continue to produce large crops to meet a large and pent-up appetite for low-cost grains. Although it might be challenging to envision a price rally in today’s environment, preparing for one is necessary. This planning is called rehearsing the future. So, ask yourself, at what price level would you be a willing seller? Odds are good that, if prices do reach your targets, there is reason (either real or perceived) for price strength. You will doubt whether selling is a good idea and likely question your strategy, or even cancel your orders.
To instill discipline in your marketing, now is the time for end users to shift risk and producers to set a plan for future sales. Both can be initiated now by purchasing call options.
For feed buyers (end users), this will provide insurance against higher futures prices, yet leave the bottom side open for a price decline; an ideal situation moving forward. If you are a grain producer, consider buying calls now to cover future sales. Place orders above the market at target points. Include your wish list orders – prices you don’t believe the market can reach. If prices do rally, owning call options provides the discipline to keep your sell orders in place. In each of the last six years, December corn futures have rallied with the minimum recovery at $4.17. Yet price recoveries have been short-lived, making it difficult to make enough sales.
As weather unfolds, projections for the size of the upcoming crop will change, and it will not take a vivid imagination to see how fast buying interest could develop. Allow your target orders to be triggered, with those bushels already covered. Bottom line: Be ready!
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARMER, extension 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.