It’s All About Weather
Volatility in futures contracts has picked up as the corn, soybean, and wheat markets have experienced strong gains over the last week. December corn traded as low as $4.90-3/4 (May 18) and up to $5.59-1/2 as of June 13. A nearly 70-cent rally is mainly due to dry weather in the central Midwest. If rain materializes over the next 10 days, weather concerns will be limited, and prices will likely trend lower. If drier weather continues, the market may be on the verge of a significant rally higher. Let’s look at the different scenarios and plan for each.
What happens if rain doesn’t materialize in a meaningful manner? This would suggest that December corn futures could quickly retrace back up to the fall high of near $6.37. Obviously, since the fall of 2022, market conditions have changed with demand lacking, a record Brazilian crop, and more intended acres in the U.S. Crude oil prices are stagnant near $70, and end user buying for commodities has reverted to a just-in-time inventory approach. Yet, weather trumps all variables. By many accounts, the crop has already peaked in size, with this month’s USDA report indicating a record yield of 181.5 bushels and 92 million planted acres. The world will likely become more aggressive in buying commodities if it fears a shortfall is at hand. This, along with slow farmer selling, and you have a perfect storm for a bull market and strong price advance. To prepare for this, consider using call options to cover any sales you’re making on rallies. Short-dated options might do the trick for a limited time window. Otherwise, consider purchasing December or March calls. Buying put options is an alternative if you don’t want to make a cash commitment. Puts establish a price floor while leaving unpriced grain open for a price advance.
What if the market runs out of steam (weather improves) and prices head lower? Prospects for record-large production and yield near 180 or higher are still possible if copious and timely rains fall soon. In this case, end users are likely to buy only as-needed, as perception in the marketplace changes. To prepare for this scenario, consider using stops under futures or purchasing puts. Stops are orders that are triggered if the market trades at or through the stop price. Once triggered, you become a seller. The key is to understand you are not a seller until the market moves lower. Think of stops as trigger points. Purchasing puts is a good way to create a price floor while leaving grain unpriced. Use hedge-to-arrive contracts if willing to make a cash commitment and not wanting to immediately lock in a basis. If you use cash contracts (forward selling) or become triggered into futures, you can then purchase call options to cover upside risk.
The bottom line is that in mid-June, the market participants look to weather and its impact to determine crop size – it’s all about weather. Farmers and their support staff have done about as much as they can. Now it is time to wait and see. Preparing for large market moves will create a less stressful environment.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
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.
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 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.
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Bryan Doherty