Adding to the Confusion

Uncertainty and volatility continue to rule the markets. In less than two weeks old crop corn futures prices declined about $1.30. During that same period, soybean futures prices slipped nearly $1.50. On Wednesday of this week some old crop corn futures prices approached limit down during the day, but new crop (December '11) futures prices showed small gains. Then on Thursday, corn prices were limit up and followed by strong gains in overnight trading. After more than a week of declining prices, soybean prices were showing strength on Wednesday and followed through with strong gains on Thursday. The lower prices and volatility have occurred in markets where the supply/demand situation, along with uncertainty over 2011 production, would appear to support a continued price uptrend.

Unexpected events can derail the markets even when strong fundamentals appear to provide support. Two weeks ago, corn futures prices remained in a long term uptrend and soybean futures prices were showing signs of returning to an uptrend. Then the Japanese earthquake and tsunami led to worries about the potential of a nuclear meltdown. The damage to Japan's port facilities added to concerns about grain demand from a major importer. There have also been worries about the impact of these events on global economies. These events spooked investors, who liquidated some of their commodity positions. This contributed to the sharp declines in corn and soybean futures prices. However, the Japanese concerns seemed forgotten on Thursday. A weaker dollar, higher oil prices, strong export sales and rumors of Chinese corn buying spurred the corn market to limit higher gains. News stories are reporting rain delayed harvest causing soybean quality and delivery problems in Brazil. This reportedly is leading to rejection of some Brazilian deliveries by China and supporting US soybean prices. Changing global news events just seems to add to the confusion in the grain markets.

Market uncertainty and volatility is not likely to end anytime soon! Political unrest, economic conditions, fund trading, energy prices, currency values and other factors continue to influence grain markets. Supply/demand fundamental factors also provide a great deal of uncertainty. Some of the fundamentals to watch during the upcoming months are:

• The USDA's March 31, 2011 Prospective Plantings and Quarterly Grain Stocks reports. This won't settle the "acreage question," but it will provide more solid information to base production estimates on. The grain stocks will provide use updates and additional clues to estimate old crop ending stocks.
• Weather! If anything is less predictable than the markets, it is probably the weather. Some forecasts indicate wet conditions through April for the eastern Corn Belt, which could delay corn planting. However, if conditions allow timely planting, actual acreage could change from the March intentions.
• The USDA's first new crop supply/demand estimates will be released in June. This will provide a first look at the 2011-12 crops, but remember last May's projected carryovers changed considerably by harvest time.
• Weather! If the crop is off to a good start by mid-June and the weather forecasts remain good, then the market may begin to anticipate large production and easing of supply worries. Poor weather or crop conditions would have the opposite effect as the corn crop moves into the pollination growth stage.
• The USDA's August supply/demand estimates will provide the first surveyed look at 2011 production. The markets typically anticipate this report and it can set the direction for prices into harvest time.
• Weather! August is considered the critical month for soybean production. However, depending upon earlier growing conditions, expectations for both new crop corn and soybean production may depend heavily on weather conditions for the remainder of August and into September.
• Other factors may come into play before the production is assured. Economic conditions, domestic use, global demand and anticipated 2011-12 ending stocks will influence new crop prices.

These factors will likely keep prices volatile for several months. Other unexpected events will only add to the confusion. This volatility and uncertainty continues to make marketing decisions difficult. Did the price declines of the last two weeks trigger any sales as downside "price traps" where hit? If not a good question may be, why not? Short term uptrends on corn and soybean price charts along with some potential price support levels were violated, providing technical signals to make sales. The sharp price declines illustrate why these can be important market signals and why capturing profitable prices is important.

How to make sales is not an easy question to answer either. New crop cash bids for harvest delivery contracts at most Missouri locations indicate weak basis. This results in disappointing new crop prices and a basis many may not want to accept. An alternative is to use hedge-to-arrive (no basis established or NBE) contracts, but opportunities for basis gain may still be limited. Futures hedges may offer more flexibility for cash delivery and basis gains, but considerable cash flow risk from potential margin requirements exist. Adequate financing and a lender that understands hedging will be important for this strategy. Using put options to protect prices may offer the most flexibility in pricing, but premiums are expensive. At-the-money December 2011 corn puts are about seventy-five cents and November soybean puts are nearly $1.20. This may result in disappointing net cash price floors. Some of the more complex strategies of buying and selling options to reduce net premium costs may offer opportunities to improve the price floor. However, if choosing one of these strategies, it is important to understand how it works. They are designed to manage risk, not eliminate it, and often create new risks and include margin requirements.

Although many of these marketing strategies have disadvantages and some result in somewhat disappointing prices, they should still be considered. If revenue based crop insurance has been purchased, it offers some protection. But volatile markets result in considerable risk and unpredictable events sometimes produce significant price declines. Most of these strategies offer the opportunity to protect a profitable price, especially if prices recover more in the weeks ahead. There are no easy marketing decisions and in the months ahead expect any new events to only add to the confusion.

[CAFNR] [AgEBB] [DASS] [FAPRI] [Ag MRC]