Weekly Corn Review
Risk management remains name of the game.
Published: May 24, 2013
It's the time of year when farmers like to talk about "gambling stocks." But while this phrase typically is used in connection with old crop, it's also prudent to make sure you're not taking excessive risk with new crop corn you hope to raise in 2013.
December futures couldn't hold its April lows this week, breaking on news farmers planted some 42 million acres of corn in a single week. Then the market was able to reverse higher, with divergence on the daily chart also suggesting at least a short-term bottom.
Still, the Dec chart is far from bullish long-term. Every new low this year was met with the same divergence, and it didn't do more than provide a brief respite before selling resumed. If futures can get over their 50-day moving average around $5.425, the 100-day average and a long-term channel line will come into play around $5.60. That's just a nickel below the Revenue Protection base price and growers who don't have bushels above their guarantee priced should use that type of rally to get this initial coverage on.
Risk management remains name of the game.
Last week we mentioned buying out of the money calls on a break, which for now looks like it's over. One alternative to consider would be the short-dated $6.50 September new crop calls for a nickel or less. If adverse weather develops this summer – or if a wet end to the plant season really chops acreage – these would provide additional protection through the August USDA crop estimate for making sales.
Short-dated September new crop puts also could be used to guard on the downside. The at-the-money put is running around 31 cents, a cost that will creep higher on rallies. One alternative for grain that is headed for storage would be to sell a deep out of the money July 2014 call, say the $6.50, to pay for the put. This is marginable but caps the selling price with a hedge that would be profitable.
Is such concern needed? History suggests tight old crop stocks increase potential for rallies, and 2013 so far has been less than ideal. But farmers probably will still wind up planting a whole lot of corn this spring, regardless. Demand will improve, but feeding is the only source of consumption with much upside. Ethanol is no longer a growth industry, though it provides a great base of support. Exports should recover, but even though my forecast is more optimistic than USDA's, sales don't look likely to explode unless China suffers a bad crop. The growing season there isn't ideal either, but so far there's no cause for real excitement.
That's why I don't believe growers should get too carried away with the 2013 "gambling stocks." Adding protection from the ACRE farm program to crop insurance takes away a lot of potential for a train wreck. But blindly believing prices will rally takes more faith than I have. Getting significantly past the RP base price will take conditions that convince the market that 500 million bushels of production potential have been lost. It could happen, but I wouldn't recommend betting everything on it.
Another alternative is to get started with 2014 crop sales. Red December is testing its 100-day moving average after four times holding a test of its $5.30 base. Selling 5% to 10% up to $5.80 may look good a year from now.
For more on this, download my weekly Corn Report using the link below.
Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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