Capturing Profitable Prices Using Market Signals

The markets have been offering profitable price opportunities. Corn prices began an uptrend last September with May 2007 corn futures (old crop) increasing by more than $1.80 per bushel. This was from about $2.60 to just under $4.50 by late February. December 2007 corn futures (new crop) increased almost $1.50 per bushel with a recent high near $4.30. Corn futures prices this high have only occurred one other time in history (1996)! Soybean prices were also in a strong uptrend during the same September to February period. May soybean futures increased about $2.20 per bushel. They began near $5.80 and topped above $8.00. New crop (November) 2007 soybean futures increased approximately $2.40 per bushel with a recent high above $8.40. July 2007 Chicago wheat futures prices have trended upward and sideways with prices in the $4.00 range, with recent highs moving above $5.00 per bushel.

More than $4 corn, $8 soybeans, and wheat near $5 have certainly offered opportunities for setting and achieving profitable upside price goals. These historically high prices would normally suggest marketing recommendations for aggressive selling of old and new crop corn, soybeans, and wheat. While most market advisors have recommended some sales, grain demand for biofuel use has changed the way most look at the markets. Strong demand for ethanol, along with other corn uses, has resulted in a delicate supply/demand balance. This has made most advisors cautious about making sales recommendations. Many producers are unhappy that they have already sold too much of the old crop before prices really took-off. They are now uneasy about making sales, especially with all of the uncertainty surrounding 2007 production.

Following the late February highs, prices have reversed and appear to be in short term downtrends. May corn futures declined about forty-cents, while the December new crop contract has lost nearly twenty-seven cents from the high near $4.30. Both contracts have broken technical chart support levels and slipped below several moving averages that technical analysts follow. May corn prices have penetrated the uptrend line drawn off of the September low. December corn is challenging a similar trendline for that contract. Breaking of support levels, moving averages, and trend lines are often seen as market signals to sell. These represent price levels that could have been used (and some still can be) as downside price traps. Price traps are downside price goals with the objective of capturing profitable prices before they decline further.

Similar downward price adjustments have occurred in soybean prices. May soybeans declined nearly sixty-cents from the February highs of more than $8.00, bounced somewhat higher, and are now showing weakness again with prices near $7.50. November soybean prices showed a similar price dip and are now trading near $7.90. Large soybean carryover and a large South American crop provide bearish concerns for soybean prices. These technical and fundamental market factors suggest significant downside price risk for soybeans, unless planted acreage comes in much less than expected.

A variety of factors have contributed to the recent price weakness. Liquidation of long positions held by trading funds for profit taking, and maybe to meet margin calls when the stock market tumbled, accounts for some of the decline. The South American crops will soon begin to provide export competition for both corn and soybeans. In addition, private acreage forecasts suggest a large increase in corn acreage with some private market service companies estimates in the 88 to 90 million acre range. These are 10 million acres or more of an increase over last year’s plantings and higher than the FAPRI and USDA estimates of near 87 million acres. These and other market factors contributed to the weaker prices and the markets were overdue for a correction. After sharp up moves, markets typically pause or correct while awaiting new market news to determine price direction. The uptrend could resume, but continued price weakness in the corn and soybean markets also point to additional downside price risk. Filling the January price gap in December corn could take prices down to $3.75 and possibly lower. Filling the price gap in November soybean futures would take prices below $7.30.

Although downside risk is still there, most analysts expect grain prices to remain well above the prices of recent years and the potential for much higher prices still exists. The number of ethanol plants in production, along with plants under construction, continues to increase. Feed and export demand projections for corn are expected to be met and soybean demand remains strong. All eyes are on the upcoming March 30, 2007 USDA Prospective Plantings report as the market struggles to get a handle on 2007 production potential. Corn planting is beginning in southern areas, including parts of Missouri, and weather conditions during the next few weeks will be critical to getting the crop planted on time. Once the corn crop is planted, summer weather will add to production concerns, likely creating market volatility into the summer months.

One of the keys to successful marketing is to make disciplined sales when planned upside goals are met or downside price traps have been triggered. Regardless of whether sales have been triggered near recent highs or captured with price traps as prices turned lower, new price objectives should now focus on where to add to sales, or begin selling, if no sales have been made. Downside price traps near $3.90 (December corn futures) could capture this price before the market declines to fill the chart gap near $3.75 or lower. For those expecting prices to rally, upside price goals near previous highs would capture higher prices. Then setting traps near $4.00, or above, would capture a higher trap price if a rally failed to reach previous highs. November soybean price traps near $7.70 or $7.60 would capture these prices should technical trading attempt to fill the price gap with futures prices near $7.25 or lower.

How much should be sold? Although it would seem to be hard to go wrong selling corn at about $4.00 and soybeans near $8.00, this is still not an easy question. These are historically high prices, but a number of factors could push prices higher. While downside price risk also exists, many analysts believe this may be limited. FAPRI baselines suggest corn prices above $3.00 as ethanol demand provides support to the market.

Sales should be spread out. The amount of each sale and the total quantity sold with preharvest sales may depend upon a number of factors. Expected production and available storage determines how much is expected to be delivered at harvest time. A pre-harvest sale of grain with delivery during harvest avoids pricing at harvest time and this is usually when prices are lower. If corn acreage is increased, locking in a profit on expected production from the increased acreage may be advisable. Those with crop insurance may be more confident in making preharvest sales if production is reduced. Revenue assurance (RA) or crop revenue coverage (CRC) policies offer additional protection for both price and production if contracted production shortfalls occur. The February price rallies resulted in RA and CRC base prices of $4.06 for corn and soybeans at $8.09, which offers considerable revenue protection with these policies. Although there is the dreaded risk of margin calls, using futures to hedge sales offers more flexibility and eliminates the risks associated with delivery on cash contracts. Option premiums are expensive, due to the volatile markets, but option strategies can eliminate some pricing and delivery risks along with the ability to capture a portion of unexpectedly higher prices, should they occur.

How sales are divided up, regardless of the pricing strategy, setting price goals and following market signals while spreading out the quantities sold can be an effective marketing strategy. But, no market strategy is perfect. Upside price goals may not be reached. Downside price traps may be triggered and then prices may reverse, moving higher than before. In spite of these difficulties, spreading sales insures that profitable sales are made while additional quantities remain to be sold if prices surge higher. The objective is to capture favorable prices and avoid the risks associated with pricing everything at once or selling at low harvest time prices.