Tuesday, February 9th, 9:22 a.m.
It is another report day, with the monthly supply and demand projections today at 11 a.m. With the tightness of grain stocks, these are taking on added significance in comparison to a year ago. To illustrate how things can go two different directions, I will focus on corn.
With prices at multi-year highs, good demand, and supply at multi year lows, it is natural to turn to two years from the recent past that had similar scenarios, those years being 2008 and 2012. Looking at the dynamics of how each year unfolded can give us a very good way to approach this year’s marketing.
In 2012, even up to June, new crop carryout was being projected as 1.881 billion bushels. Smooth sailing, that is until we had the flash, extreme drought that took that same carryout down to 650 million bushels by August. Prices reacted accordingly, rallying past the high prices made in the spring/summer of 2008 and 2011 that seemed to be impenetrable at the time, hitting 8.49 in August. So, in sum, we had a relatively good supply that was getting used up by extreme demand get massively tighter. Prices reflected that.
2008’s June new crop carryout was projected to be 673 million bushels, causing a rally to 7.99 in June. But the opposite came along for a growing season that year, allowing us to take carryout back up to 1.79 billion bushels shown in the January 2009 report. Prices reflected this hitting a low of 3.05 in December of 2008. That is a move of almost $5 in 6 months time!
I mention all of this not to predict a price (high or low), nor to extrapolate supply and demand scenarios. We know we are going to (with weather cooperating) plant as much as is possible. The market is going to make that happen. One thing that I’ve been concerned with is a continuing La Nina. But as of January 8th, the likelihood of it continuing into spring is put at a 45% chance of continuing into the spring, and therefore a 55% chance of it transitioning into a neutral condition. It seems to me to come down to a coin flip as to if we have weather conducive to a bid crop, or conditions that trim the potential.
With prior blogs, I have mentioned the need in years such as this that it is essential to be able to capture upside, while making a sale. While I have heard the argument made against spending the money to protect this upside, remember that the run away, extreme profits have to be captured when they are offered, due to the nature of the commodity markets returning to an oversupply status. What I’m talking about most certainly comes down to the risk aversion of an individual, and we are all different. When it comes down to a coin flip of capturing a profit profile that will make a farming career much easier from a profit and loss standpoint, are these odds that can be passed up to be able to partake in potentially run away market? To me they are not.
Protect the downside by either making an outright cash sale or an HTA, then use an option strategy. I favor bull call spreads, but other strategies can be used.