Opinion
By Larry Martin
As this is written, December corn futures have traded in a range between US $3.81 and $3.58 for six weeks, since mid-July. This range came after a precipitous drop from the $5.00 area in April and May.
Everyone is trying to guess where the market’s going from here. Of course no one knows, and the real question is how does a producer who missed the five dollar opportunity make a decision about pricing the commodity now?
Fundamentally, the market is paying attention to the size of the new US corn crop and, in particular, its average yield. Last month, USDA suggested it will be a record 167.4 bushels. But many people believe it will be higher. There is also a question about whether lower prices have been effective in stimulating demand, particularly export demand. Recent export figures are confusing because some weeks’ exports are up, and others are down. Changes in either one of these factors can result in another major move either up or down, and the next major opportunity is Sept. 11 when USDA releases its next report.
What is disquieting is that from a long-term chart perspective, the next level of technical support is $3.08. For most producers, the current level is not very attractive, but $3.08 is downright ugly! For many producers, this would be a disastrous cash flow outcome.
What should a producer do about pricing his or her new crop corn if they missed $5.00? One obvious alternative is to wait and see what happens. That will be a good alternative if the current level is the bottom and prices rise. It won’t look so attractive if USDA reports a 172 bushel yield on Sept. 11, and the market approaches $3.08.
Pricing now has some advantages because the local basis is fairly attractive; it should be possible to price new crop corn somewhere around C$3.90 -$4.00. But if a shortage occurs later in the crop year, then, prices will rise and this will not be very attractive.
Another alternative is to price some now and buy Call options to protect against pricing too low. Currently, December $3.80 Calls are trading for 8.2 cents per bushel, while futures are trading at $3.631/2. If a farmer forward contracts for fall delivery now and buys December $3.80 Calls, and prices rise to, say, $4.25, the farmer will receive the contract price, plus a gain of US $.45 on the Calls less potentially some loss on the premium. If the market drops to $3.08, the farmer will receive the forward contract price and lose no more than US 8.2 cents on the Call. One can also do this using March Calls.
What to do here comes down to a matter of assessing risk. If $3.08 or lower is disaster for your farm, then you should do everything to try to avoid it. If you can live with the risk, then by all means, it is fine to speculate in the cash price. At any point in time the market knows, what the market knows, and that’s what will be used for pricing. This market is waiting for new information to decide whether it’s going to rise or fall from the six-week sideways trend. Producers have the opportunity to manage risks at every point in time, but if the market falls precipitously again, it may be a long time before the opportunity arises to price at this level.
Larry Martin is one of the principals of Agri-Food Management Excellence, coaches farmers on futures markets and teaches the Price Risk Management using Futures & Options course running Nov. 12-14, 2014 in Red Deer and Jan. 27-29, 2015 in Guelph
Please register to read and comment.