March 16, 2021
Risk management can get down in the weeds quickly with complex math and what-if’s. Before whacking your way through all that undergrowth, remember that marketing choices right now boil down to a simple question. Is a bird in the hand worth two in the bush?
As I’ve discussed the last two weeks, that bird in hand is a big one: Both new crop corn and soybean futures contracts offer a shot at solid profits for 2021. Nonetheless, with seed still in the bag, months of weather uncertainty loom that could prompt a move to even higher prices.
That’s one reason farmer marketing plans often involved the hope of selling summertime rallies. History supports this notion. Over the past 47 years only about a quarter of highs are posted from January through March. For corn, 57% of the annual highs came after May. Soybean highs are even more back-loaded, with 70% of the tops coming from June to November.
Trying to call the top in any market can be a fool’s errand, hence the attraction of that bird you’ve already bagged. But farmers holding out for more still need some targets to shoot at before entering that briar patch. Here are four ways to aim your sights. None is fool-proof, but they at least offer some rationale for decision making.
History of past rallies
Weather is the prime driver of summer and fall rallies. In the spring, from March through May, projections of new crop supply and demand can stimulate gains if traders are worried about acreage and production falling short of usage.
The most-watched barometer of fundamentals comes from USDA. The agency issues its first official monthly forecast of 2021 crop supply and demand in May, and there’s a good correlation between these estimates and spring rallies. The tighter the projected ratio of ending stocks to usage, the greater March-May gains tend to be.
While traders this year don’t have USDA’s May numbers to work from, they do have a good proxy. In February government economists updated their initial take on the coming year. This outlook called for tight corn and soybean stocks to continue in the year ahead, based on statistical guesses for acreage, yields and demand.
Comparing these early estimates to past rallies suggests the market has already factored in much of the gains, one reason futures appear stalled ahead of big March 31 acreage and stocks reports. This analysis points to March-May highs in December corn futures from $4.65 to $4.95. The contract high close so far is $4.8475, in the upper half of that range.
Tight soybean stocks project to a March-May top in November futures from $11.70 to $12.75. The closing high so far is $12.62, close to the top of that range.
If USDA’s early estimates put a ceiling on the spring market, growing season conditions could be the next hope for another leg higher. Indeed, there’s a good correlation between rallies in the summer and fall and how well yields turn out compared to normal.
No one knows what surprises are in store this summer. But even in a year with normal yields, the market tends to rally. Based on these models, December futures have a shot at $4.98 to $5.31, with November futures taking aim at $12.93 to $13.37.
Average cash price forecasts
Another way to pick selling targets compares USDA’s forecast for average cash prices to futures. USDA’s current forecast for average 2021 cash prices of $4.20 corn and $11.25 soybeans translates to average futures of $4.62 and $11.92.
Prices, of course, never stay average, but fluctuate up and down. Adding in a statistical projection for rallies creates a range that covers most of the expected range for the crop year. For corn this target is $5.12 to $5.61, with soybeans at $12.90 to $13.87.
With new crop corn and soybean futures trading near contract highs, using technical analysis to pick targets gets a little more complex. Instead of daily contracts, looking at perpetual charts can be useful. These string November and December contracts together from previous years to provide a view of how current prices compare to the past. Another twist is back adjusting these charts to account for rolls when contracts are moved from one crop year to the next.
For December corn, the perpetual chart has a target a the 2014 high of $5.17, with another objective around $5.81. On the back-adjusted perpetual chart, targets appear at $5.04 and $5.645.
For November soybeans, $13 and $14.095 loom on the perpetual, with $12.98375 and $13.2275 stumbling blocks before a run at $14.
Back-Adjusted December Corn Perpetual
December Corn Perpetual
November Soybeans Perpetual
Back Adjusted November Soybean Perpetual
Average futures prices over the past five decades also confirm farmers’ bias towards summer rallies. But spring gains are only a 50-50 proposition. December corn futures ended May higher than March 15 just 46% of the time. Soybeans fared better 53% of the years from 1974-2020.
Average gains from summer rallies were impressive in bullish years, topping $1 in soybeans and 50 cent for corn. But posting higher summer prices is far from a given. December futures was higher at the end of summer than in mid-March just one of three years. November soybeans fared better, but still were higher only 51% of those years.
Those averages are a caution that sometimes that bird in the hand isn’t a bad deal at all.
Knorr writes from Chicago, Ill. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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