- MARKETING -
Bullish Markets Or Train Wreck Ahead?
|By Melvin Brees|
A wide variety of opinions exist among market analysts and others looking at the agricultural economy. Some see encouraging signs for price improvement in the grain markets. Others are still worried that low prices and economic problems may lead to a “financial train wreck” for agriculture.
The U.S. economic recession and slumping world economies contributed to the rapid grain/oilseed price declines from last year’s record highs. Prices recovered somewhat at year’s end, but declined again as economic worries continued, and grain prices have since struggled in their attempts to recover to early January highs.
Last year’s increased grain production worldwide exceeds anticipated use. Wheat and corn exports have been much slower than in 2008. The increased production and slower exports cause expected domestic and world carryover supplies of coarse grain and wheat to increase significantly.
Fluctuating currency values and weak energy prices have also been negative influences on grain prices. The USDA continues to project lower feed use for corn and reduced soybean crush. These and other market factors, when combined with high production costs, suggest significant market risks along with the potential for a financial train wreck for agricultural producers.
Good news for soybeans
Corn and wheat exports are struggling, but it appears to be more of a result of increased world grain production rather than demand destruction. In spite of poor world economic conditions, the USDA projects increased world use of wheat, corn and other feed grains over previous years.
The surprisingly strong demand, along with reduced corn and wheat acreage intentions for 2009, dry conditions in the southern plains, the extent of freeze damage to wheat, planting delays for spring wheat and wet Corn Belt conditions with possible planting delays make a case for higher price potential.
Soybeans appear to be the most bullish right now. The USDA projects a tight 2008-09 carryover of only 165 million bushels.
Some analysts believe soybean ending stocks will eventually decline to “pipeline” levels by the end of the marketing year. Export demand remains strong and reduced Argentine production, along with farmer tax protests, have reduced Southern Hemisphere competition.
Factors affecting market direction
Other factors could also become important to market direction. How quickly the economy turns around and the extent of the recovery will be important. Final acreage may be different than the March intentions. Total prospective planted acres of major crops are less than was planted last year. While these may be marginal acres, there is the possibility that more acres will be planted.
The acreage mix could also change. Weather and its impact on production also become more important as the growing season approaches. Various combinations of these supply, demand, price and economic factors could tip the scales toward improved price prospects or back toward a marketing train wreck.
Managing risk is essential
The negative economic factors and other markets (energy, currency, stocks, etc.) could overshadow grain market fundamentals and send prices lower, which could make current prices seem high. Instead of expecting higher prices, the goal should be to recognize and capture profit opportunities.
In these uncertain markets, the challenges will be when and how to protect profits without selling too quickly or waiting too long. New crop cash bids at most Missouri locations offer some profit. However, the profit margins offered for soybeans are currently better than those offered for corn for most of the state’s producers.
For other Corn Belt states, prices may still slightly favor corn. But changing new crop soybean/corn futures price ratios (near 2.3/1) are also beginning to suggest a market shift that may favor soybeans, which might be a consideration in any last minute changes to production plans.
Target or add to soybean sales
Delay sales if November futures prices move above the January highs, but at the same time increase downside price traps to these levels to protect against a price reversal. These price objectives are examples of where to begin targeting or adding to soybean sales.
December corn futures prices have traded sideways for nearly a month in a range that is supported near $4.11 to chart resistance at about $4.37. Consider adding to sales if prices move through the support toward $4.00 to at least protect a narrow margin on a portion of the crop. Delay sales and raise downside price traps if December futures prices move upward through $4.40.
Wheat prices are also in a sideways pattern similar to corn. Current new crop cash bids do not represent prices that offer profits over total costs. But, they do more than cover operating cost, and downside breakout from the sideways trend may suggest protecting a margin above operating costs.
Melvin Brees is the market/policy Extension associate, FAPRI, University of Missouri. Read his column at www.agebb.missouri.edu, Farm Market-ing, Decisive Marketing. Contact Brees at
There are no easy answers to this question. With a decent growing season and normal production, new crop corn and soybean cash bids offer profit margins for most producers. Cash contract sales would protect these profits on the portions of the crop sold at these prices.
Futures hedges would accomplish nearly the same objectives, but margin requirements could be substantial if prices increased significantly.
Expensive option premiums make it difficult to purchase at-the-money (ATM) put options for corn or soybeans. The premium costs would wipe out profit margins and out-of-the money (OTM) lower-priced put options would not protect prices at profitable levels. This suggests that more complicated option strategies may be needed.
A fence (buying ATM puts and selling OTM calls), a bear spread (buying ATM and selling OTM put) or other option spread strategies could be effective to use.
It is important to understand how each strategy works, the risks associated with it and be prepared for the cash requirements needed to complete the strategy.