| July 16, 2010 | Archived Issues |
Uncertainty Prevails
"Can you explain the corn (soybean) market to me?" This seems to be a common question by producers or others associated with agriculture this year. Markets have been difficult to predict, moving against seasonal patterns at times, and have been frustrating with sharp price reversals. Corn prices moved lower in the first half of the year with short rallies in February, April, May and early June. Each rally was cut short when prices reversed and declined sharply. Opportunities seemed to evaporate before sales were triggered. The soybean market provided somewhat better sales opportunities in April with prices in the upper one-half of expected price ranges. But soggy fields caused many to be cautious about sales and prices sagged.
The markets seemed to have been following the old adage that "rain makes grain." In late June prices seemed headed lower based on plenty of moisture and good crop condition ratings. Then the USDA provided surprises with fewer corn acres and smaller than expected third quarter corn and soybean stocks. Corn and soybean prices rallied sharply. However, the USDA's July supply/demand projections were near trade expectations and prices faltered somewhat. But prices have since shown strength with higher corn and soybean futures prices in recent trading. Other factors such as energy prices, dollar value or stock prices continue to seem to influence grain prices more some days than others. Prices again appear to be in an uptrend, but corn and soybean prices usually begin to decline from late June or early July into harvest time so there is downside risk. What's next?
The production side for many producers remains uncertain as well. Corn condition ratings improved slightly in the USDA's latest crop conditions summaries. But many corn fields are uneven, indicating nitrogen losses, and have drowned out spots. Although these condition ratings remain good for corn, many wonder about the effects of excessive moisture on production. Many soybeans were planted later than double crop soybeans should be planted and some never even got planted. Questions remain about those soybean acres that may not have been planted and about yields on the large percentage of late plantings. Will production be higher or lower than the USDA's current projections? These production uncertainties will cause the markets to watch private analysts' forecasts of production and everyone will anticipate the USDA's first surveyed look at 2010 production in August.
The production risk and market uncertainty has left producers in a variety of difficult marketing positions. For many the traditional methods of setting upside price targets and forward contracting have not worked as planned. Those who have drowned out corn and late or unplanted soybeans may have sold too much already. Some may have hesitated to follow through on plans to make sales and are now facing possible downside price risk in uncertain growing conditions. Others are uncertain about when or at what price to add sales, especially if their crop looks good. As the growing season progresses and harvest approaches there will also be selling or storing decisions to be made. In spite of the uncertainties, history suggests that marketing should not be postponed until production is assured. However, risk and uncertainty suggest alternative pricing strategies and more flexible pricing tools.
Many market analysts provide technical marketing (charts and price signals) along with their fundamental analysis (supply/demand factors). The technical signals may be helpful in deciding when to make sales or protect prices. Some of the more commonly reported technical factors are resistance prices levels, support price levels and market trends. One strategy might be to make sales if prices fail to move above resistance price levels. This may signal a price reversal and can capture prices before the market declines significantly. A similar strategy can be triggered on lower prices if prices penetrate price support levels, targeting sales before a downtrend accelerates. The market appears to have established a short term uptrend and following an uptrend can be a good strategy. But, to capture acceptable prices, it is important to be prepared for making sales if the trend reverses. There are other technical market signals (moving averages, reversal days, etc.) that analysts may use in their recommendations and may also be useful. While they may provide false signals (for example a trend might be broken with sales triggered and then prices turn higher to resume the uptrend), technical factors can be useful in helping determine when to make a sale in unpredictable markets.
Unpredictable markets and uncertain production prospects may call for use of different marketing tools. This may be the time to consider using options. Buying at-the-money put options seems expensive, but they can still provide price protection. In spite of the premium cash outlay, recent (7-15-2010) soybean put premium quotes would net soybean futures price protection in the upper one-half of the USDA's currently forecast price range. Current corn put option premium quotes may seem less desirable, providing price protection near the lower end of the forecast price range. However, the price protection value should not be ignored and higher futures prices should be watched for opportunities to provide more favorable price protection.
For those more comfortable with use of options, more complex strategies may be considered. While they can be effective, it is important to understand how these option strategies function or talk with a market advisor to insure it is appropriate for the price or production risk situation faced. Some of these strategies (fences, spreads, etc.) can lower premium costs while protecting against lower prices and maybe capturing higher prices. Other alternatives may include buying out-of-the money call options at strike prices near or above the upper end of forecast price ranges. These can be used to provide confidence in making additional cash sales since they would capture higher prices if prices moved significantly higher after a cash sale is made. The call options can also be used to manage risk for those who think they may have sold too much or at too low of a price.
Production and price uncertainty is likely to continue. Production projections are sure to be revised as the USDA and others survey production or make crop tours. Demand projections will be adjusted and outside factors will continue to affect market action. This creates volatile markets with upside potential and significant downside risk at the same time. When markets are difficult to understand or explain, the objective should continue to be strategies for managing risk instead of speculating on how high prices could go. This is especially important when the individual producer's production is uncertain.