Selling in Volatile Markets

Uptrending bull markets are offering pricing opportunities with soybean futures prices approaching $9.00, corn more than $2.80 and Chicago wheat futures have traded near $4.00. However, due to the wide daily price swings, these volatile markets can make deciding when to sell difficult.

How high will prices go? Market analysts struggle to provide some answers to this question, but no one really knows. The grain markets have been in an uptrend and are at historically high prices. While there are valid arguments for higher prices, it is important to remember that $3 corn and $8 soybean prices usually don't last very long. Since predicting how high price will go and when the high will occur is uncertain, attempting to sell at a market high depends on luck and is not a realistic marketing goal. Selling in the top 1/3 or 1/2 of the annual price range and avoiding selling at market lows represents a more reasonable approach to marketing. Fundamental (supply/demand) analysis suggests that prices are in the upper portion of projected annual price ranges. This signals pricing opportunities and selling remaining old crop (2003) production in the upper 1/4 of the annual price range may be an achievable goal.

A number of marketing strategies and sales tools can be used to manage some of the risk occurring in volatile markets. These strategies probably won't capture the "high," but they offer opportunities to achieve reasonable price goals and capture profits. It is important to understand that volatile markets can produce "surprises" and the results of some strategies can be disappointing. However, having a strategy to capture higher prices usually beats having no strategy at all.

Spreading Sales: It just makes sense to not sell everything at once when markets are volatile and uncertain. Unexpected events can quickly change the price outlook. Selling a portion of grain inventory at favorable prices insures that some is sold at profitable prices. If prices increase, more is available for sale and when sold at higher prices increases the average price of grain sold. Similarly, if prices decline, some grain has already been sold at higher prices and provides a higher average price by offsetting later sales as prices decline.

Set Price Targets: Having a price goal tends to make selling somewhat easier. Using upside price targets together with spreading of sales allows following a market uptrend with "scale-up" sales. When a higher price target is reached, a portion of the grain is sold. If prices continue to increase, additional sales are made at higher price targets-resulting in increasingly higher average prices. Price charts or technical analysis can be helpful to identify price targets. Setting price targets at or just below technical price resistance is one method of identifying price goals. Resistance prices represent earlier price highs that previous rallies failed to exceed or where prices "resisted" going higher. For example, March '04 corn futures have price resistance at the recent contract highs near $2.87. Other corn price targets might be the longer term chart resistance at highs near $3.00 or $3.20 that occurred in 1997.

Price Traps: In volatile markets, having downside price targets or "price traps" is also important. While everyone likes to focus on upside price targets, being prepared to make sales if the market declines can help salvage higher average prices early in the price decline. These sales are difficult to make because price were recently "better," but the objective is to capture favorable (or at least decent) prices before prices decline to much lower levels. For example, a producer may have sold some old crop soybean inventory at prices above $8 and is now targeting $9 for additional sales. This producer should also be prepared to make additional sales near $8. If prices don't rise to $9 and the market begins to decline, additional sales near $8 would increase the amounts of grain sold in the $8 price range. Setting price traps just below technical price support (previous price lows where prices reversed and moved higher) or below chart uptrend lines are two possible methods of identifying price traps.

Selling Methods: Cash sales or forward contracting for later delivery of remaining old crop inventories are the most common method producers use to spread sales and capture price goals. The same techniques for identifying sales targets can be used to liquidate futures contracts or call options purchased to re-own previous cash sales.

Pre-Harvest Sales of 2004 Production: The same price targeting methods can be used to establish price objectives for pre-harvest sales of 2004 production expected to be delivered at harvest time. Other objectives such as setting price traps that produce returns above production cost/return break-even may be given higher priority in pre-harvest sales. However, production risk associated with delivery requirements and potentially weak basis bids may sometimes make new crop forward cash contracts less appealing. Hedging by selling futures contracts or buying put options can avoid delivery requirements or weak basis, but margin requirements on futures positions or high put option premiums may be worrisome to some. More complex option strategies (covered calls, fences, bear-put spreads, etc.) are being recommended by some market advisors and offer some attractive ways to mange price risk and lock-in favorable prices at a low net option premium cost. While these can be very effective risk management strategies, it is important to understand how they work and the potential financial or contract obligations associated with them.

Bidding for Acres

Term "bidding for acres" is often used to describe late winter price action in November soybean and December corn futures contracts. These futures contracts represent prices for harvest time delivery of corn and soybeans in most of the Corn Belt. The need for larger production of one crop can result in higher new crop futures prices for that crop compared to the other crop. For example, if December corn prices are high in relation to November soybean futures prices, the market wants more corn produced and is "bidding" for increased corn acreage. Bidding for acres is more likely to occur when supplies of one or both crops are relatively tight and prices are above CCC loan price.

The soybean/corn price ratio is used to describe the price relationship and whether one crop is favored over the other. The ratio for new crop soybeans and corn would be calculated by dividing the price of November soybeans by the price of December corn. For example, $6.00 soybeans and $2.40 corn results in a soybean/corn price ratio of 2.5. Market analysts often describe a ratio of 2.4 or 2.5 as the breakeven ratio. A higher ratio favors soybeans and a lower ratio favors corn. Understand that the ratios are not precise and the break-even can vary considerably, depending upon production costs and expected yields. While the 2.4 or 2.5 may describe the breakeven ratio in some areas of the Corn Belt, Missouri yields and costs often suggest a 2.3 or lower ratio may apply and prices often favor soybeans over corn in this state. An even more accurate ratio for individual farmers can be obtained by using actual farm production costs, expected yields and local basis patterns to determine the cash price ratio needed to breakeven between the crops.

An interesting situation is developing for 2004 crop prices. A variety of market factors along with very tight domestic soybean supplies and tight world corn supplies suggest large 2004 production of both crops is needed. In early December 2003, following the record corn harvest and when many were expecting 2004 corn acres to increase because of disappointing soybean yields, the new crop soybean (Nov '04)/corn (Dec '04) prices were $5.90/$2.45 or a 2.41 ratio. Recently (2-19-04) November soybeans were $6.68 and December corn $2.84 for a ratio of 2.35. Strong corn demand, lower estimated ending stocks and the need for a large corn crop in 2004 has shifted the ratio slightly toward favoring corn. While the ratio probably still favors soybeans in Missouri, the markets appear to be bidding for a few more corn acres nationwide. However, tight U.S. soybean supplies and concerns about South American production could easily tip the balance back toward more soybeans.

This "bidding for acres" provides market signals for last-minute planting decisions on crop acres that could be planted to either crop. The price bidding may also provide new crop pricing opportunities as the market bids up crop prices. This might be a short lived opportunity. The ratio may change if the markets are successful in attracting more acres of one crop or other factors enter the market. Prices also may slip lower, once the crops are planted and it appears that production will be adequate.