| June 20, 2008 | Archived Issues |
"I Won't Do That Again!"
Corn prices have continued their uptrend, setting new record highs several times in recent weeks. Soybean prices have rebounded after an early spring decline and have now moved higher than the previous record prices set earlier in the year.
Many analysts have referred to this price action as a "perfect storm" that has resulted from just the right combination of factors to send grain prices to levels most never thought was possible. Growing world grain demand, a weak dollar that is encouraging exports, strong domestic feed demand, high oil prices, policies favoring biofuel production, weather that produced disappointing crops in various parts of the world, bidding for acres, investment funds flowing into commodities, inflation and policies to curb exports in some foreign countries are among some of the many factors that contributed to high grain prices. Adding to this mix is excessive Corn Belt rainfall causing planting delays, flooding and replanting that is apt to reduce 2008 crop production. While some try to point at a single cause, it is the combination of these and other factors that have caused the bull market and record prices in grains.
Although high grain prices should be good news to grain producers, marketing in this situation is challenging. For example, in late February 2008 soybean prices were at record highs and corn prices were near previous highs. This was the first time since 1973 that soybean prices had reached a new high and corn prices had only set a new record high once (1996) in more than thirty years. New record high prices do not occur often and making sales when they occurred was expected to be the right thing to do.
Many of these earlier sales of 2008 production are now, at best, nothing to brag about! Many producers are now in the position of thinking they sold too early, sold too much, sold at too low of a price and some maybe even sold more than they may produce. What seemed like an easy decision to sell at almost unheard of prices in late winter now appears to have been the wrong decision. In spite of the fact that most of these are still profitable sales, the reaction often is, "I won't do that again!" However, selling near record high prices is probably something that should be done again.
When marketing grain, it is important to keep focus and concentrate on marketing the remainder of the crops at favorable prices. Do not dwell on "I wish I hadn't sold then." Concentrate on how to make additional sales at record price levels.
What kind of pricing opportunities are the markets offering? The USDA's latest supply/demand projections (June) forecast tight corn supplies with farm prices ranging from $5.30 to $6.30 per bushel. New crop (December 2008) corn futures prices have been more than $1.50 per bushel higher than the top end of this price range! The USDA's forecast for soybean prices is from $11.00 to $12.50 per bushel. November 2008 (new crop) soybean futures prices are nearly $3.00 per bushel higher.
In spite of these record level prices, corn and soybean prices remain in steep uptrends, signaling that prices will continue to move higher. Supply/demand factors continue to support the markets as well. Many market observers will watch price action closely in late June and early July, since markets' peaks frequently occur in this time period. But, predicting a top is difficult to do. This suggests strategies using technical analysis signals, such as broken uptrends, broken price support levels, etc., which can allow following price uptrends in effort to target sales near price highs. Using futures or options can protect prices without committing to delivery of the grain when production is uncertain. It is also necessary to follow the markets closely as prices can reverse quickly in volatile markets.
At these price levels, downside price risk is also huge. Although weather and production uncertainty could still push prices higher, most of the previously mentioned bullish factors may already be "priced into the market." Just as a number of market factors combined to form the "perfect storm" that sent prices to these levels other factors could come together and eventually send prices lower than expected.
Although corn and soybean supplies will certainly be tight, improved weather conditions would lessen crop production concerns.
Livestock liquidation by producers squeezed by high feed prices is likely to reduce feed demand. Once this occurs it takes time to rebuild breeding herds and restore demand for livestock feed.
High grain prices, some recovery in the strength of the dollar and continued high transportation costs may eventually contribute to reduced export demand. Foreign coarse grain supplies are expected to recover somewhat. Increased wheat production will add to feeding of wheat, which will also result in less foreign demand for US grain.
Any weakness in oil prices would squeeze ethanol production margins, leading to plant shutdowns or delaying new plants from coming on-line. Policy efforts to waive or repeal mandates, and allow biofuel tax credits or import tariffs to expire, could also trim ethanol production and discourage new investment in biofuel production.
Legislation or regulations to limit fund investment or trading in commodity futures could lead to large scale futures liquidation by investors and contribute to a price collapse.
Other policy fixes, such as opening up of Conservation Reserve Program (CRP) acres, along with the potential for increased acreage and production next year, could help bring about lower prices.
Tight supplies, production worries and strong demand are expected to support prices at high levels. However, any of the above factors, or a combination of more than one of them, could lead to lower prices and possibly a sharp decline. This possibility reinforces being prepared to make additional sales, especially if prices show any signs of weakness.
Although selling at what were very good prices earlier in the year (and may now be somewhat disappointing prices) may be discouraging, this does not mean selling near market highs should not be done again. Spreading sales and capturing high prices is still more likely to be more successful than not selling because "I don't want to do that again."