| February 18, 2011 | Archived Issues |
Market Risk
The USDA's February world Agricultural Supply and Demand Estimates made no changes in supply/use for soybeans and wheat. Adjustments to global supply/use projections for soybeans and wheat were relatively small with only minor carryover changes. However, the USDA did increase projected corn use, which would further tighten US corn ending stocks and result in the lowest stocks to use ratio since 1995-96. These changes also contributed to downward adjustments in world corn and coarse grain carryovers. This provided some bullish fundamental news for corn, but otherwise not much has changed during the past month. Strong demand with tight carryovers and production worries continue to contribute to higher prices and market risk.
Recent price action illustrates some of the market risk producers face for 2011. Nearby corn futures prices (March 2011) had exceeded $7.00 and some analysts were looking toward the 2008 record highs of $7.65. Then in two days prices tumbled nearly thirty-cents. New crop (December 2011) corn futures prices slipped more than thirty-five cents in the same time period. In just over a week old crop soybean futures prices declined almost one-dollar and new crop (November 2011) futures prices slipped more than sixty-cents. However, during the next two days of trading, old crop corn futures prices recovered the entire decline and then some by setting new contract highs. New crop corn prices recovered most of the loss with double digit gains. Soybean prices recovered significantly as well.
Market prices have exhibited volatility since late June 2010. December 2011 corn futures prices have had a range (low to high) of about $2.40. November 2011 soybean futures prices have ranged nearly $4.90. Occasionally limit or near limit prices moves up or down have occurred. Price uptrends remain in place and many analysts remain confident that prices have no way to go but up.
While most are bullish, some analysts caution that at some point high prices should curtail demand. A few weeks ago, it appeared that corn exports might be slowing, but recent sales have exceeded trade expectations. Will livestock producers be squeezed or will narrow margins slow ethanol use? Maybe, but there are few signs that these corn uses are slowing. Soybean exports may be shifting to South America. Brazil is expected to have large production and some analysts believe it will even exceed the USDA's current estimates. Late season rains have also helped the Argentine crop. Recent export sales reports have been below expectations and suggest that the shift to the Southern Hemisphere is beginning. However, there is little evidence that high prices are slowing corn or soybean use.
It is important to note that strong demand, tight carryovers and higher prices are more of a factor for old crop (2010-11) than new crop (2011-12). Although there is concern about 2011 planted acreage and the need for large production in the coming year, the tight supplies are more reflected in old crop futures prices. December corn futures prices are about one-dollar lower than March futures prices. November soybean futures prices are about thirty-cents less than March futures prices. This is not an unusual situation in a strong demand market, but it also illustrates that the market recognizes that 2011 production could rebuild tight supplies somewhat. While acreage surprises or poor growing season weather could result in sharply higher new crop prices, the market is already sending signals that prices for 2011 crops may not be as high as prices for the 2010 crops.
They may be lower than old crop prices, but current new crop futures prices near $6.15 for corn and more than $13.70 for soybeans are well above some of the early projections for 2011-12 average prices. Although the USDA will not issue their first monthly 2011-12 supply/use projection until May, they did release their February long-term baseline projections. These included 92 million acres of corn with a price projection of $4.80 and soybean acreage of 78 million acres and price at $11.20. Other early projections by some analysts project corn acreage near 91 million acres and soybean plantings of near 77 million acres. A few other price projections range from $4.70 to more than $5.00 for corn and soybean prices from $10.90 to more than $12.00. New crop cash bids at most Missouri locations are also well above these early 2011-12 average price projections. This suggests that, although prices seem headed higher, there is downside price risk as well.
Many other factors could contribute to price risk. These include energy prices, dollar value, economic conditions, policy decisions, etc. along with foreign political unrest, livestock disease outbreaks and other disasters to name a few. This creates a complex environment for managing price risk.
Revenue Protection crop insurance policies provide a starting point to manage some of the risks. Base prices will be established in February and currently are on track to exceed $6.00 for corn and be more than $13.50 for soybeans. While this provides revenue protection, it does not cover that much price risk if normal yields are produced. At 75% coverage, it would take corn prices below $4.50 to trigger payments with APH yields. This is $1.50 or more downside price risk! Revenue protection is an important risk management tool, but more is needed to mange price risk.
The marketing strategies offered in last month's Decisive Marketing should still be considered. These include setting upside price objectives along with downside price traps to trigger sales. Trailing stops can still be used as a method to follow the uptrend. Options are still expensive, but they can also provide price protection. Spreading sales also captures good prices and can lead to a respectable average price.
The corn uptrends are intact and soybean prices have recovered from the recent break. There are good arguments for higher prices, but downside price risk should be recognized too. It appears that prices will be good; they just may not be this good! If sales are delayed, it is very important to know what prices or what market action will trigger sales.