farmgate: Your Marketing Seat Belt Protects You During The "Tractor Seat Bounce."
Did you tell USDA a month ago that you were going to plant more soybeans because beans provided a price advantage over corn? If so, look again, because corn now has an advantage over beans. Some of your neighbors have decided to make the shift since the Prospective Plantings Report two weeks ago, hoping to cash in on the rising corn market and fading bean market. Before our total focus turns to planting, let’s make sure our marketing plan is current.
With the help of Extension Marketing Specialist Chris Hurt at Purdue, we’ll review his April 12 corn newsletter.
The market will be watching the same thing Cornbelt farmers are watching and that is the weather. Ethanol plants are also watching the margin between production costs and corn prices, and Hurt says there is a 30¢ cushion for refiner profitability. Futures prices may push toward $6.40, but cash price increases will need acreage shifts away from corn because of weather delays.
Old crop corn has been costing you storage and interest and may be wearing out its welcome in the next few weeks. Hurt suggests a marketing plan that allows you to keep some old crop for sale in the typical volatile market around pollination time. For the rest of it, determine if a June delivery premium will cover storage costs, plus interest of 8¢ per bushel. If it won’t cover commercial storage, move your elevator-stored corn first.
New crop corn may give you the opportunity to sell at a record price of $6.50. Hurt is recommending about one-third of your new crop being priced by mid-May. Your elevator may be one of many not offering a cash contract. If so, you can probably get a basis contract, then use a commodity broker for a hedge. If 2008 corn acreage is relatively small, then ending stocks will decline and the basis will strengthen. If 2008 corn acreage is relatively large, then Hurt believes harvest cash prices may be in the high $4 to low $5 range.
Advanced marketers may want to consider using the options market to set a floor and a ceiling above the market. Buying a $5.70 put option establishes a floor price if the market falls. Selling a $7 call option establishes a ceiling well above the expected market, but the income from the call reduces the total cost to 10¢ per bushel. Keep in mid there will be commission charges and a margin fee for the call option, and before using this plan, ensure you know all of the financial risk.
In his April 12 soybean newsletter, Chris Hurt suggests:
The market has fallen substantially since July futures peaked at $15.96 on March 3 and boosted many farmers plans for increased soybean acreage. The great expense of meeting margin calls caused many speculators to liquidate their long positions and prices fell. Also with higher ending stocks estimated by USDA and good production in South America, the domestic and global supply of soybeans is higher than earlier thought.
With the old crop in mind, the forecast 18% increase in soybean acreage will provide a greater supply than expected, so prices will average closer to the $10.50 mark. With a wet forecast that will shift some corn acres to beans, the bean market is facing several bearish factors. However, the low value of the dollar and high oil prices are offsetting a decline in soybean prices. Hurt believes soybean prices might fluctuate over the next couple of months between $12 and $14.50. He also expects the soybean basis to improve because old crop beans are in tight supply and many farmers would rather plant than deliver beans in the next two months. As a result, Hurt recommends being 80% sold for old crop beans by the end of May.
If new crop planted acreage fades as expected and ending stocks increase, normal yields for the 2008 soybean crop would be met with a harvest cash price in the range of $9 to $10. Hurt thinks November beans may trade from $11 to $13 over the next couple months and provide a marketing opportunity if cash prices reach into the $10 to $12 range. However, the basis is 80¢ to $1.20 because elevator operators are being subjected to a wide basis as well because of expected volatility. A normal crop would reduce that volatility and the basis could tighten by as much as 40¢.
Advanced marketers may want to consider a hedge to arrive contract, if offered by an elevator that would allow the futures price to be set and then await the basis to tighten. Or a futures hedge could be established with a commodity broker on 30% to 40% of expected production by the end of May. An option strategy by buying a $12.40 put option and selling a $14 call option would establish a floor and ceiling for just 34¢ per bushel. However, a marketer should be familiar with the risk of selling an option.
Summary:
The planting season usually means a “tractor seat bounce” in the market which would provide pricing opportunities for both corn and soybeans to take advantage of the market. Corn needs to find more acres and if that can be done with higher prices, then the new crop price will fade into harvest. The soybean market is trying to find its level in the midst of more acreage and higher supplies. However, with many elevators backing away from cash contracts, many farmers will have to utilize a futures hedging strategy with a commodity broker and then write a basis contract at the elevator when the basis tightens later this year. Additionally, options strategies can be used, which will lock in profits at a reasonable cost.
Posted by Stu Ellis on April 14, 2008 12:38 AM to farmgate