Impossible Task?

How high will corn prices go? Will corn prices reach the previous high of $5.54? Will these prices last? How much new crop should I have sold? Should I be selling now? These are examples of some questions that farmers across Missouri are asking right now. March and December Corn futures prices near $4.00 per bushel offer significant profit potential for old crop (2006-07) and new crop (2007-08) corn. However, the markets are volatile and showing signs of moving even higher. There appears to be upside price potential, maybe a lot of upside potential! No one wants to sell at $4.00 if prices may go to $5.00 or more. But there is also downside price risk with a great deal of uncertainty about increases in corn demand and production potential in 2007. Will high prices curb demand growth or encourage a huge increase in production? Although prices have reached levels that everyone has “dreamed about,” it may seem like an impossible task when it comes to setting price targets or making actual sales decisions.

Strong demand is driving the corn market. The 2006 corn crop was the third largest in history. It totaled more than 10.5 billion bushels, but use is expected to exceed this large production . Although livestock production is being squeezed by high feed prices, corn used for feed is still expected to exceed 5.9 billion bushels. World grain supplies remain tight and exports are expected to be more than 2.2 billion bushels. Growing ethanol use will consume more than 2.1 billion bushels. This demand, combined with other uses of corn, is expected to total more than 11.7 billion bushels and reduce ending stocks to only 752 million bushels. This sharp decline in ending stocks from last year’s 1.9 billion plus is a major factor in driving prices higher.

Corn demand growth is expected to continue. Ethanol plants under construction suggest more than three billion bushels of the 2007 corn crop will be needed for ethanol production. This, along with other demand, will require increased corn production in 2007. Most analysts believe that at least eight to ten million additional acres will be needed and high prices suggest that the market is “bidding for these acres.”

Other factors are also affecting corn prices. Oil and other fuel prices influence ethanol prices and, ultimately, the demand for corn used in the production of ethanol. The value of the dollar and shipping costs, along with foreign production of competitive grains, affects exports. Commodity fund trading in grains, especially the large index funds, adds uncertainty to the corn market. Weather at planting time or growing conditions during the summer can contribute additional market worries until 2007 production prospects are better known.

Any number of these production, demand, and other unknown factors could combine to produce substantially higher or lower prices. Most producers realize that current prices represent historically high prices and profit opportunities. However, the potential for much higher prices or a run at the 1996 record high cannot be ignored. The possibility that prices could fall from current lofty levels is also worrisome. This creates somewhat of a marketing dilemma. The potential for higher prices causes a reluctance to make sales, but risks passing up very profitable prices if the market reverses and moves lower.

It is not an impossible task, there are selling strategies that can work in this volatile market. A disciplined marketing strategy that is designed to follow prices higher or capture upside price goals, together with downside price traps, fits the current situation. The goal should be to capture higher prices if offered and at the same time not let current profitable prices slip away without making sales.

Corn prices surged higher following the February USDA supply/demand estimates that tightened corn carryover significantly. Since then, December 2007 corn futures have generally traded in a range from about $3.87 to approximately $4.04. Until recently, the market has been reluctant to move above this price range until recently when it has been challenging these highs with prices near $4.05. These highs represent technical price resistance that can be used as price targets to make or add to sales. This would capture current market highs if price fails to move higher. If prices penetrate this resistance, or move above $4.04 to $4.05, it will be a signal that prices may be ready to move higher. If this occurs, then additional sales could be delayed until the market establishes a new high or turns back below $4.04. Although these strategies are not perfect they are a method of targeting higher prices to make sales.

While targeting higher price, price traps should also be identified. Price traps are downside price targets with the objective of capturing profitable prices before they collapse. December futures prices have been supported near the bottom of the price range near $3.87. Penetration of this price support, would suggest prices will move lower. The next lower support would be at the highs, prior to the February USDA reports, which was $3.75. Price traps or downside price targets just below these support areas would offer the opportunity to capture profitable prices before a market downtrend accelerated.

These strategies require discipline and the ability to react quickly in a volatile market. It takes discipline to “pull the sales trigger” in a volatile market when prices could be higher tomorrow. It is important to remember that in this same volatile market they might be lower tomorrow as well! Cash contract offers at elevators or market offers placed in advance with brokers based on some of these upside price targets and downside traps can make the task easier. Making selling decisions in a volatile and uncertain market is not an impossible task, but it does require planning and discipline.

What about soybeans? The supply demand fundamentals for this market are very different than corn. Domestic and world carryover supplies are expected to be at record levels. While there are some weather and rust concerns in Brazil, South American production is expected to be large. However, other factors, including worries about reductions in soybean acres and fund buying of soybeans, have pushed soybean prices much higher than the supply/demand factors would suggest. In fact, while corn has remained in a trading range since moving higher after USDA’s February reports, soybean prices have broken higher. They remain in an uptrend.

For soybeans, the selling objective may be to follow the uptrend until it reverses. This would require using downside price traps or trailing stops to trigger sales when the market reverses. For now, a trap price for new crop soybeans could be placed just below recent short term price support at just below $7.90. Keep in mind, that this is a volatile market with supply/demand fundamentals that suggest considerable downside risk. If the intent is to follow the trend, it is important to be prepared for quick selling action if the market reverses.