(Agriculture.com) – The grain markets have reached plateaus that we term “gray areas.” In December corn, this is likely $4.25 to $4.75. In beans, this is $11 to $12. Given projected carryout numbers and some weather uncertainty priced into current futures trading ranges, we anticipate both commodities could be at the point where making a bullish or bearish argument has strong merit. The key for you, as a producer, is how to manage the potential movement out of this gray area.
First, we’ll focus on corn. Corn futures, trading just under $4.50 a bushel for three consecutive days as of this writing, suggests that $4.50 is the resistance point. Last year’s high for the December 2015 contract was $4.54. The current estimated carryout is 200 million bushels, and this would suggest that supplies are ample and there may be little reason to suggest a rally above $4.50. Good weather and high yield could suggest a movement down to $3.50 or less. On the other hand, less-than-ideal weather and a drop-off in yield could quickly rally prices at least $1 and send prices well over $5.50. Extreme adverse weather could run prices back toward $8.
For soybeans, carryout has been on the decline for three months and now rests at 260 million bushels projected for the 2016/2017 season. November prices at $11.50 seems to be an equilibrium price that makes sense. Yet, good conditions and high yield could quickly drop bean prices in November back toward $9. With uncertainty in weather, prices could be off to the races, and $11.50 would be viewed as a stopping point, while prices gear up for the next run higher. If yield drops 2 bushels per acre at the current acreage prediction, this would suggest carryout dropping from 260 million to 100 million and would warrant a rally toward $15 or higher. Weather in the next 60 days or so will be critical for price direction. Therefore, those who can best manage to navigate volatility and embrace the potential for rapid price movements through the use of strategy will probably be best suited to handle changes that are likely to occur.
A simple method to establish a price floor is to purchase put options. Purchasing puts requires a healthy cash flow situation when volatility is high and after prices rally. Have a conversation with your lender. Higher prices equal higher premiums to be paid, yet you’re locking in price floors that, just a couple of months ago, were viewed as price levels the market would likely not reach. If you prefer forward contracting, be careful how much you forward contract. If you’re concerned that prices could shoot higher, cover these forward contracts with call options. These could be at-the-money or out-of-the-money. Whatever the case, they should act as safety valves against higher prices.
Anticipating market moves and planning for them can provide confidence through a growing season filled with uncertainty.
If you have questions or comments, or you would like a balanced strategy for your operation, contact Top Farmer Intelligence at 1-800/TOP-FARM, ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
