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Market volatility — managing risk

Robert Huston starts his session on grains marketing with the question, “What single factor do you think affects the corn market the most: weather/yield potential, crude oil, the dollar, gold, index funds, ethanol, or the economy?”

And using tiny electronic devices, each audience member can punch in a number for the answer he/she favors, with results tabulated on the auditorium screen.

As Huston, who is general manager of the Bloomington, Ill., advisory service, AgriVisor, predicts, none of the answers gets a runaway majority.

“Wherever I do this presentation, in the Corn Belt or elsewhere,” he said at the Mississippi Farm Bureau Federation’s Winter Commodity Conference at Jackson, Miss., “the results are usually the same — a broad range of answers.

“No single answer is the right one,” he says. “All these factors affect the market.

“That said, however, I would choose the dollar, which is having a huge impact on our exports. With a lower value dollar, our exports are more attractive to other currencies with greater buying power. A lower dollar will enable us to have strong exports and will be good for the market.

“My overall bias for grains is bearish,” Huston says. “While there are reasons to be bullish long term, I’m more concerned right now about the potential for downside risk than I am optimistic about the upside potential.

“Because of the large corn crop, the higher prices we had prior to the January USDA report, and the way the dollar’s been acting, the numbers for corn aren’t that impressive, especially if we want to see higher prices for corn.

“A lot of analysts are looking at $4.53 as a strong resistance level for corn on the upside, with support around $3 on the downside, and that’s pretty much my bias. I’m more concerned about protecting downside risk than I am optimistic about prices going to $4.50.

“In many cases, $3 is not a profitable level for corn, so if you get an opportunity to lock in $4 to $4.50, it’s our opinion that you should do so.”

There’s a lot of corn in the Midwest, which is reflected in the USDA’s 2009 production estimate of 13.15 billion bushels, with ending stocks of 1.76 billion bushels — not a record by any means, but a pretty significant number. The 165.2-bushel average yield was a record and higher than what the trade was expecting.

“Total usage was 13 billion bushels, an impressive number. Of that, 4.3 billion went to ethanol and 2 billion to exports.

“Going forward, I expect we’re going to see continued volatility, a lot of ups and downs, but within trading ranges.

“Fertilizer prices have come down quite a bit, but farmers are still doing a lot of number crunching going into the new season.”

AgriVisor analysts are projecting more corn acreage this year, Huston says, “and even with a 13 billion-bushel crop, keeping exports stable at 2 billion and raising ethanol use to 4.6 billion bushels, we’re still looking at a 1.6 billion-bushel carryout.

“It’s going to be interesting to see, between now and planting season — especially with the price of soybeans and the price of fertilizer — if we get a higher planted acreage, given the hit corn prices have taken following the January report.”

Adverse weather was a factor for much of the country last year, regardless of the crop, Huston notes. The Corn Belt has had weather problems the last two years and October was one of the wettest on record over much of the Mid-South and other corn-growing areas.

“This could affect the market in terms of basis, and also when that corn comes to market. A lot of high moisture corn went into bins, and many farmers are worrying about quality, so there’s likely to be quite a bit of corn coming into the market over the next couple of months as a result of these quality concerns.”

Is the corn market going higher or lower, Huston asked the audience, and 60 percent of the electronic responses were for lower prices, 40 percent higher.

“My own personal bias is that it will trend lower between now and spring because of all the corn that’s going to come to market,” he says. “Even though there has been index fund buying of corn, I don’t think there’s going to be enough to offset the selling pressures.

“December seasonal corn charts indicate what most of us know, that the best time to be forward marketing corn is between February and June.”

It’s interesting, he says, that index funds have been adding to their long positions in corn, even after the January USDA report.

“I think some of this is that they’re looking at corn as an asset class to offset some of the risk in the stock market. They’ve also added to their long positions in soybeans since the January report.”

From 1992 through 2009, volatility in the corn and wheat markets has continued to increase, Huston says, with higher highs and lower lows, and “I expect this volatility is going to become greater in the future.”

Producers need to take steps to protect themselves against the risk in volatile markets, he says.

“Risk is any uncertainty that can affect the achievement of your objectives, including those that can help your business and those that can hurt it.

“You’ve got to protect your basic risks first, using tools that have been around for a long time — whether it be crop insurance, futures, or cash sales. Then, you might be able to accept some risk above and beyond that to try and enhance your bottom line.

“What I’ve found in working with farmers is that the best way to market grains is to be diverse, to use different tools, and to not try and hit the high by selling all your grain at one time. If you sell in small increments and vary the ways you market your grain, you’re going to be a lot more satisfied long term.”

A key to successful marketing, Huston says, is diversification.

“If you’ve done things one way in the past, consider breaking that up a bit and trying some new things. With the volatility in the markets, it’s going to be increasingly difficult to sell successfully. Diversify the way you manage price risk, and if you’re not familiar with basis or options and other methods, seek professional marketing service to assist you.

“A lot of producers don’t like to use options, and five, seven, 10 years ago when corn traded in range of $2.20 to $2.50, you didn’t need options. They were too expensive and there wasn’t enough opportunity to justify the bother. But when you have the price of corn go from $8 to $3 in one year, or from $4.50 to $3, there’s a lot more reason to use options now than in the past.

“I urge you to become familiar with them — find a trusted advisor who can explain them to you and help you come up with a way to diversify your risk.”


TAGS: Outlook
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