Suppose you are sitting on a large volume of 2019 corn. What should your approach be for marketing in a seemingly unfriendly price environment?
First, before we get into specific tactics, let's talk about a proper frame of reference for the market backdrop:
Old-crop demand is severely curtailed this year with lost ethanol usage. Yes, ethanol is making a comeback, as we noted last week. But it is a long way from normal, and getting to normal is likely months—not weeks—away.
South America enters the last stages of their corn growing season. They might be a few ticks lower due to problems in Southern Brazil, but overall Brazil and Argentina should tally a 150 MMT crop, on par with their previous production of 151. That will mean continued export competition unless currency values sharply change.
The U.S. growing season is mostly good, with June weather shaping up to be just enough moisture and heat to get this crop to pollination in good shape. A 97 million acre crop combined with good yields creates few opportunities to see better prices.
Finally, volatility is low. The July corn futures has held a narrow 15-cent range over the past six weeks—between $3.15 and $3.30. Daily changes seem to rarely register more than a cent one way or the other.
Here are some tactics to consider for marketing the remaining bushels left on old crop.
If you ever took sour medicine as a kid, chances are your parents encouraged you to hold your nose. In other words, you gotta do it, but minimize the bad taste.
If you need to sell 20% of your crop over the next two months, then you're just going to have to hold your nose and be disciplined about pulling the trigger. Split your crop into 5% lots and make either time-based or price-based sales. For example, you could sell 5% at each 5-cent higher move in the market and give yourself two weeks to sell each of the 5% blocks.
If you don’t reach each price threshold within the designated time, you still should pull the trigger.
Second-guessing our choices is always a challenge. What if I sell today, but prices rally next week? But if I don't sell, prices could go down and make things worse.
For those of us who struggle with these choices, a “fence” strategy is a good approach. By buying a put and selling a call, we protect downside risk but retain upside potential to a point on unsold grain. That way you let the market do what it's going to do over the next 60 days, but you have some boundaries around the risk and reward.
For example, using September corn options, you can buy a 325 put and sell a 345 call at roughly no net premium (that is, the price you pay to buy the put is about the same as the credit you get for selling the call). This allows you to keep upside open up to 345 but then have limited downside risk to 325.
This floor/ceiling approach is a good approach for those decision-makers who find pulling the trigger a challenge. Even if you do not have a brokerage account, this transaction can be done through FBN’s Virtual Elevator via a physical delivery contract, so speak to your FMA about executing it.
One way to increase your floor price on a fence strategy is to add a “double-up” option to it, which gets executed if prices are at the ceiling at expiration.
Again, through FBN you can use a Fence Plus contract on September delivery, but in this case your floor is raised from 325 to 333 and your ceiling is lowered slightly from 345 to 343. The benefit is to give you a tighter floor price with still some window for upside. Here you would only want to do half of your quantity; if the price gets to the ceiling at expiration you would need to double your quantity. If prices fall, then you would be guaranteed your floor price on half those bushels and could finish out the remainder at the prevailing price.
We see a low chance that prices can rally 40 to 60 cents in the next 60 days. June weather seems to be shaping up to be decent enough to keep crop prospects good. Furthermore, a strong surge higher in ethanol seems unlikely. On the other hand, a 20-cent move higher is more likely over the near term.
We see the large speculative short position as a decent lightning rod for the market. For this time of the year, corn shorts are the largest they have been, and historically this level of shorts can significantly improve the odds of a price rally. However, a potential catalyst is needed to get short specs to cover. It could come in the form of a faster recovery in ethanol or a continued increase in Brazil’s currency value.
But if weather continues to be ideal and crop prospects look strong by midsummer, the weight of big new-crop supplies could cause another 20 to 40 cents down on corn prices. So again, we emphasize that old-crop sales need to be made quickly. Late summer and early fall prices could be as bad if not worse than today’s readings.
Time is of the essence on old-crop sales. A massive 97 million acre corn crop sits in the field getting good weather and chances are we see downside risk into fall. Short-run upticks could happen here, but be disciplined in making sales or taking strategies that eliminate downside risk.
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