June 30, 2022
Corn futures have lost nearly $1 over the past few weeks as the beginning of summer price volatility is upon us. Summertime fundamentals for grain futures can mean both angst and excitement for farmers. USDA reports, crop progress ratings, and ever-changing weather forecasts bring extreme price volatility.
Fundamentals this summer
On one hand, market prices remain supported by the reality of tight ending stocks in the United States and the need for a large U.S. crop this summer. After recently talking with clients about old crop bushels on hand, most have very recently “sold out,” taking advantage of near $8 cash corn prices. Of those who still have grain in bins, they suggest they are down to less than 5% of total production on hand.
With basis still so strong throughout the Midwest, it also makes me wonder what grain elevators or ethanol plants have on hand for corn in storage. If they had bushels available wouldn’t old crop basis levels be wider?
On the other hand, high prices will ultimately lead to larger production around the world. The second crop corn in Brazil being harvested now has been substantial. This second crop corn will likely be quickly exported to the world, at “just the right time” since U.S. stockpiles are dwindling.
Here in the United States, if the crop growing in fields right now receives timely rains and is perceived as being “good enough,” that mentality will likely keep prices from making new all-time highs in the short term.
Ultimately, weather has the final say. A hot and dry Mid-July could zap record yield potential since this crop will pollinate a bit later than normal due to late planting.
Take control of volatility
Bottomline, most would agree that prices are still historically high. With high prices comes high volatility. One day corn prices could be up 20 cents, and the next day down 30 cents just based on a weather forecast.
The key is to understand that you can manage volatility by positioning yourself for both higher and lower prices, despite the outlook. Let’s be honest, none of us know what the future holds for grain prices in the short term. A strategic approach allows you to be mentally and emotionally ready for whatever the market does in the coming months.
What does a strategic approach look like?
For grain farmers, this means forward contracting with your local grain elevator/ethanol plant to capture high prices on approximately half your expected crop. Regarding the other half that is not priced, consider purchasing put options to protect against a price drop.
Put options protect a price floor when purchased. Puts give you the right (not the obligation) to be a hedger (seller of futures). If futures prices decline you can either exercise/change your put into a short futures or sell/exit the put you had purchased.
What if prices rally? Your put will lose value, but keep in mind, the other half of your expected crop production is still unpriced and can increase in value.
The forward contracted bushels cannot participate in a price rally. However, if you purchase call options on those bushels, now you have re-ownership. Call options can participate in a price rally and, if they have value, can be sold or converted into a long futures position.
The end goal is to position yourself so that, no matter what the market does, you are able to participate in a price rally or decline, for all your expected production. This helps reduce emotion from your marketing plan and allows you to have confidence in your marketing decisions.
Of course, these strategies require management and should be discussed thoroughly with your advisor. Make sure you’re implementing marketing strategies that best fit your risk tolerance.
Take time now to map out the potential scenarios for the coming months for why prices could either make new all-time highs, or potentially slide lower until the harvest low.
Don’t get complacent
It seems as though a sense of complacency has hit producer mindset; marketing has been placed on the back burner, because “surely prices will stay high.” With the extreme global geopolitical drama happening around the world, and the notion that inflation needs to be curbed quickly, there are also outside market influences that could come in and become front and center stage; more than true underlying fundamentals to the grain complex itself.
Reach Naomi Blohm at 800-334-9779, on Twitter: @naomiblohm, and at [email protected].
Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by 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 National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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