Keep the Bin Doors Locked?

"Locking the bin doors" without a disciplined marketing plan is risky. A volatile market with a steep uptrend adds more risks to marketing decisions. With harvest nearly complete, corn and soybeans that were not sold at harvest are now in storage. Cash-based farmer taxpayers probably don’t want to add any more income in the current year. Markets have been in strong uptrends with forecasts of higher prices to come. So, it appears that many producers have "locked the bin doors" and are waiting for higher prices in the New Year before they begin selling grain inventory.

Higher prices seem possible. Normally at this time of year prices are just beginning to recover from harvest-time lows. But this year prices have rallied throughout most of the harvest season with December corn futures prices reaching more than $3.60 and January soybean futures were nearly $6.80 recently. In response to this price action, USDA’s November supply/demand estimates increased projected price ranges by 40 cents for corn and 50 cents for soybeans. This was a huge increase! Not only are high prices surprising at this time of year, they are occurring with the third largest corn crop on record and with expectations of record soybean carryover supplies.

A number of factors are contributing to this price strength. Corn use for ethanol is growing rapidly and is expected to continue. Exports for both corn and soybean are beginning the market year with strong sales. Strong demand has caused expectations for corn ending stocks to decline rapidly. One year ago, ending stocks projections for the 2005 corn crop was more than 2.3 billion bushels. Now the projected carryover for the 2006 crop is only 935 million bushels and some believe it could drop even lower! Adding to this supply/demand mixture are huge speculative commodity futures purchases by large investment funds, all of which has caused the markets to develop counter seasonal steep price uptrends

The strong corn demand and declining ending stocks means more acres of corn will be needed in 20007. Where will these acres come from? Good wheat prices are expected to lead to increased wheat plantings and most CRP contracts have at least one more year before they expire, which limits acres that can be shifted to corn production. Most believe additional corn acres will have to come from soybeans. Although soybean supplies are large, soybean demand is strong and biodiesel use is expected to increase dramatically. Soybeans users don’t want to give up very many acres. This helps explain some of the strength in soybean prices, which have rallied along with corn. It also suggests to many analysts that the markets will continue to "bid for acres," resulting in the potential for even higher prices into 2007.

Volatile markets in sharp uptrends are difficult markets in which to make selling decisions. Recent price action has produced surprisingly good prices that are profitable for most producers, but who wants to sell $3 corn if it is going to $4 or $5? Soybeans may be overpriced, given the record large supplies, but if corn prices continue higher, won’t soybean prices also go higher? Maybe to $7.00 or $7.50? It’s easy to get caught up in the bullish market enthusiasm, "lock the bin doors," and not make any sales at all.

This seems fine until prices drop 20 cents or more in a couple of days, like they did following the USDA reports. "The markets were overdue for a correction," many analysts quickly point out. However, past history shows that markets often reverse when least expected and these market "corrections" can sometimes become the beginning of a downtrend in prices.

Strong demand, tightening corn supplies, and the uncertainty of 2007 production are positive. But large soybean supplies are negative. High feed prices are impacting the livestock industry and USDA lowered expected corn feed use by 50 million bushels. Some analysts are questioning how soon high prices will begin to impact exports. Ethanol demand remains strong with analysts pointing out that corn can go to $4 or maybe $5 and ethanol plants will continue operating. However, this depends upon fuel prices remaining at relatively high levels. Fund trading has brought money to the market, helping to push prices higher, but some worry about what will happen if the funds decide to take money out of the futures markets to invest elsewhere. As always there are two sides to every market. A number of factors support higher prices, but eventually prices will probably reverse. Good marketing decisions in volatile markets require a disciplined approach to making sales. That is easy to say, but not so easy to accomplish!

USDA’s projected price range provides one place to start in making selling decisions. The most recent projections are $2.80 to $3.20 for corn and soybean prices from $5.40 to $6.40. Corn and soybean cash prices have been in the upper half to near the top of the projected price ranges at elevators throughout the state. Bids at some locations with strong basis have even exceeded USDA’s projected price ranges. It’s usually not a good idea to sell everything at once, but adding to previous sales or beginning to make disciplined sales of a portion of stored grain at these prices may be a place to start. While prices may go higher, sales at the upper end of USDA’s projected price range are usually not bad mistakes.

Another way to take a disciplined approach to making sales is to use technical market signals. Technical signals are based on market price action and chart formations. While some are skeptical of technical analysis, and sometimes the signals aren’t reliable, many of the large fund traders depend upon technical analysis. Even for those who rely on fundamental supply/demand analysis, technical signals often provide good clues to market direction or how much prices may move. Among the easiest technical signals to identify and use are chart trends, price support or resistance areas, and moving averages of prices. Many private agriculture market newsletters identify this technical information as a part of their regular weekly analysis.

One market adage says "the trend is your friend." If the price trend is up, and as long as the trend continues, it signals higher prices ahead, which is "friendly" information. If the trend is broken, it signals a change in price direction. This is also "friendly" information because you have been warned of a change. One strategy would be to follow a trend until the trend is broken. This is a signal to make sales before prices decline further. This signal is reliable, but not 100%. Sometimes the market corrects enough to break the current trend and then reverses again to move much higher. A trend following strategy also will not capture the high, because prices have turned lower in order to break the trend. However, in spite of the shortcomings, using a broken trend as a sell signal can be an effective strategy to follow prices upward and avoid making sales too early during a strong uptrend in a volatile and uncertain market.

Support prices are levels where previous price declines stopped and turned back up. Markets often correct to a support price level and then return to their uptrend. Resistance prices are just the opposite. They are price levels where previous rallies stopped and prices reversed downward. Subsequent price rallies often return to these resistance prices before again correcting downward. Both support and resistance prices can be used for marketing decisions. A broken support level is a signal to sell. If prices penetrate or go lower than the support price level, it signals a change in the market and suggests prices may continue to decline. Resistance prices can be used as upside price goals because they indicate a point at which prices may rally to before declining again. While support and resistance prices are not always reliable, they can also be an effective way to set price goals for adding to incremental sales.

Moving averages are a measure of momentum of markets. They measure the average price of a specified number of preceding trading days. Some prefer to use relatively short moving averages like 4, 8, or 9 days. Others like 10 or 20-day moving averages. Most use a combination of more than one average. In an uptrending market, when the current day’s price is lower than the short term moving average, it signals the trend is slowing. If both current prices and short-term moving average move below the longer-term moving average, it becomes an even stronger signal that the trend may be changing. These can be used as signals to make sales before prices decline further.

Making disciplined sales based on market signals is a way to "let the markets tell you what to do." Much like the way disciplined traders make decisions when speculating in the futures markets. For those who want to "keep the bin doors locked" until after January first for income tax reasons, forward contracting or hedging sales is an alternative to making spot sales. While these strategies probably won’t capture the market highs, they usually trigger sales at profitable prices before prices decline significantly.