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'Big opportunities' brewing in the grain trade
With the grain futures markets trading at nearly 2-year highs -- $11.00-plus soybeans and $5.00-plus corn -- it's the right time for farmers to take some profits, analysts say.
A lot of fundamentals are lining up on the upside for corn and beans: The corn's been yielding fewer bushels per acre than expected, and now, harvest has been delayed by heavy rains over the last few days in the Corn Belt. Add to that continued strong demand -- that some analysts say will continue to strengthen in the near future, especially in the export market -- and there's a lot of room for upside.
But, don't sit on your hands completely while you wait for the market to top, because when that moment comes, it will come quickly, says Market Analyst Don Roose of U.S. Commodities in West Des Moines, Iowa. End-users won't keep buying at current price levels forever, and when they back away, the market will respond immediately.
"When we get to a certain level, we go to work and slow down demand. Then, you pick up demand again," he says. "That's happened in wheat and that will happen in corn, maybe sooner than you'd expect."
But, $5 corn is $5 corn, says Roose, and there are ways you can cash in on the rally underway without losing out on future upward moves. One simple way is to buy a Put. Right now, Roose says a $5.00 floor contract, or Put, for March 2011 corn costs 28 cents per bushel. A Put like this will leave your upside open and set your breakeven at $4.72.
"That is a level that is significantly above what people thought at the beginning of the growing season," he says. "Now all you have is the upside. It's more of an insurance policy."
Want even more insurance? Buy a Put a $5.00, then add a $6.00 Call. The latter will pay 25 cents, giving you price protection in the $5.00-to-$6.00 range for 3 cents, Roose says.
Back to timing: How long do you have to make a deal like this? Roose says he expects resistance to hit between $5.50 and $6.00-per-bushel prices.
"These are big opportunities. You can do some things like this and not feel like such a gunslinger down the road," he adds.
Meanwhile, John Roach, Roach Ag Marketing, Ltd, encouraged his farmer-customers to sell into this rally.
"A sharply weaker Dollar has been more than offset by strong crush and export demand, leading soybeans to skimpy new highs. We are recommending soybeans be sold on this rally. For all the fundamental and technical reasons it makes sense to sell. The real reason is farm profit and there is plenty of that on the table," Roach wrote in his daily newsletter.
Another factor on the horizon
Perhaps the other message to farmers is to sell something and hold part of your crop for potentially higher prices.
Thursday, the Department of Energy announced its review of higher ethanol blending on 2007 to current vehicles to the EPA could occur by the end of the month.
"They would take until the end of November to get the statistics on 2001 to 2006 vehicles. The net message here is those comments we have heard all summer, that the EPA may approve a partial movement to 15% for newer vehicles, may be accurate," Rich Nelson, Allendale Inc. research director, says.
If realized, a boost in the ethanol blend would boost the need for a U.S. 2010 corn crop that seems to be smaller than everyone expected.
Story compiled by Agriculture.com Editors Mike McGinnis and Jeff Caldwell.