The old adage goes, “Be careful what you wish for.” When you’ve been wishing for a price rally, suddenly it’s here. A steady downward trend in corn, bean and wheat prices since last fall prompted a quick price reversal as weather began to affect production. It didn’t take long for end users, speculators, and fund managers to take notice. Heavy shorting coverage was noted and technical formations on the charts suggested higher prices. The futures markets did not disappoint. From its low of $5.91, December corn recently topped $6.25, a nearly 23% recovery. November soybeans saw a similar rally, gaining 21.9%. Many growers were behind on new crop sales due to the large discount in first month futures contracts and a reversal between cash currently offered for delivery and new crop deliveries. Now that prices have gone up, the same old question arises: what to do now and how much should we sell?
Be aware that dry weather fears could continue to intensify or dissipate quickly in June. If they disappear, weak demand and expectations of ample supply could leave commodity prices vulnerable to a sharp drop. Additionally, Brazil has significant supplies of beans and corn, which means the world will focus on cheaper produce elsewhere. Therefore, export activity could remain slow until the world has to “buy” in the US. On the other hand, drought monitoring maps and crop assessments continue to point to smaller harvests. Beginning in the third week of June, dry weather is real and can have dire consequences. The rationale for both the bull and bear arguments is that prices are about to fall or rise sharply.
Be prepared for high volatility. Make sales at prices that make sense for your operation. Prepare for future actions. Consider covering sales with an ownership strategy that will keep you largely sane even as prices soar. Consider a strategy to protect unsold bushels. We believe it is best to assume that the strategy will outperform expectations. A simple but effective approach is to sell at least half, whether through futures contracts, hedge-to-arrive, or some type of cash instrument that you can deliver and receive a price. For the other half of your expected production, use paper products, perhaps with an emphasis on buying puts to set a price floor and leave unpriced grain open to future price increases. When the cash grain is sold, buy call options or use a call strategy that allows you to keep ownership, especially if prices rise, but with quantified risk. Visit a professional to see if this strategy works for your operation and goals.
If the past few years have taught us anything, it is that prices can and do make very significant moves in very short time frames. This year is no different. Don’t get caught on the wrong foot. Your second sales opportunity for this season is here. Embrace volatility and take advantage of it.
Editor’s note: If you have any questions about this perspective, please contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Disclaimer: The data contained herein is believed to have been obtained from reliable sources, but no guarantee can be given. Persons who act on the basis of this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Trading futures and options involves a significant risk of loss and may not be suitable for everyone. Therefore, consider carefully whether such trading is suitable for you given your financial situation. Examples of seasonal price movements or extreme market conditions do not imply that such movements or conditions are common or likely to occur. The forward prices already take into account the seasonal aspects of supply and demand. No claim is made that scenario planning, strategy, or discipline guarantees success or profit. Any decisions you make to buy, sell or hold a futures or options position related to this research are solely yours and are in no way endorsed by Total Farm Marketing or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc. and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer can have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are 100% owned by Stewart-Peterson Group Inc. Unless otherwise noted, services referred to are services of Stewart-Peterson Group Inc. Submitted for tender.
About the author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is passionate about his clients, their success and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes agricultural marketing. He has a deep understanding of the tools and markets, listens and communicates
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