The Bullish Argument for Corn Prices

What Happened

Since finding a price bottom in August at $4.14¼, the May corn futures price steadily rallied into mid-February, peaking at $5.18¾, an increase of nearly 20%. Managed money (large speculators), as reported in the weekly Commitment of Traders reports, went from near 250,000 contracts net short to over 360,000 contracts net long in corn. Was there a reason managed money bought when a record yield was forecast in October? Maybe. Perhaps the idea that yield was too high at a forecast record 184 bushels per acre, coupled with little to no incentive for farmers to sell crops at multi-year low prices, helped to form a bottom. Tightening world inventories and strong U.S. exports aided in the recovery, contributing to a price-supportive world view. Since peaking in February, May futures are trading nearly 50¢ lower. Is corn now a good buy for end users? Funds have shed contracts, and maybe the price decline in corn is a buy opportunity.

World supplies are tighter than they have been in over a decade, with U.S. stocks-to-usage at 13-year-low levels. Despite big production in recent years, increased internal demand has created a tight supply scenario in Brazil as well. While early in the planting and growing seasons, Northern Hemisphere weather will be critical. Can a forecast of a record yield for the third year in a row be held? The drought monitor map is again colorful, suggesting that, if spring rains are not plentiful, it is back to the need for timely rains this summer. Brazil is in a critical crop production stage and will be for the next 60 days. Could weather yet be impactful? The current price trend is more consolidation, indicating something is likely to change in the months ahead. Will you be ready?

Why This Is Important

Buying long-term needs as well as re-owning sold corn at historically low prices may be an opportunity that could disappear quickly. If weather becomes an issue for production, history tells us the rally ahead could come fast. In 2012, corn prices bottomed out in June despite a dry pattern. Within 60 days, December corn futures rallied well beyond $8, gaining more than $3. It probably would not take long for managed-money, small-speculator, and end-user buying to send prices higher. The key is readiness before such a rally occurs.

What Can You Do?

Take time to explore your options. Reflect on your risk tolerances. A question corn producers will need to ask is: What if prices do get to a level where sales should be made? Likely, the feel of the market will be different. You might decide to hold off. Sometimes that works and sometimes the market quickly runs out of gas, and traders can’t exit long positions fast enough. Prices could torpedo downward. To avoid this, consider purchasing call options now and set target points higher. If the targets are hit, you already have an ownership position in place. Feed buyers should consider booking long-term needs with a cash contract or buying calls.

Find What Works for You

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation rather than emotionally charged responses to market moves, which are always dynamic.

Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: (800) 334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.