Since the middle of October, the corn market has been on one heck of a run – gaining 90 cents in the March contract.
However, the last three trading days were not kind, taking out nearly a third of that move.
The January WASDE report gave us the fuel we needed to keep the rally going. But a muted February report and talks of drastically higher corn acres in the upcoming March planting intentions report seems to have put a lid on things for the time being. So, the question is: Have we put in an early high, or are we just making a correction?
It is no secret that current soybean prices are not attractive for growers as it remains difficult to create positive margins. The same can be said for growers in the Southeast with cotton, and out west with wheat. The simple fact is growers are more likely to find profit in corn this year than by planting several other competing commodities. It also helps that, generally speaking, farmers love to plant corn. With all that being said, it’s not crazy to think we could see 94 million corn acres this year, if not more.
So, what does all this mean for corn prices? Well, if we were to see a trend line yield of 182 bushels per acre with 94 million acres planted, that would put ending stocks just shy of 2 billion bushels with a stocks-to-use ratio of 12.9%. Personally, I think this could be seen as friendly in the near term. I say that because an increase in corn acres is widely expected, and I believe the market has already priced in 94 to 95 million acres.
With the funds long, I have a hard time believing they will want to liquidate their position before seeing what type of weather we have this summer in the Midwest. Now, if we get to Father’s Day weekend and the weather has been great and crops look amazing, look out below. With what we know now, we likely will continue to have support in the market on dips – barring outside market influence.
Two ways to open up the top
If you are intending to switch acres to corn this summer, I believe it would be good risk management to lock in a floor at these levels but leave the top side open.
- Buying some short-dated puts near the money for around 10-15 cents makes a lot of sense to me. This locks in a floor on those converted acres but leaves the upside open to make better cash sales.
- Another strategy I like is making sales with cash or futures, then buying a call to protect the upside.
If the market bounces off this correction and rallies into summer, both strategies allow you to be flexible while protecting your profit margins.
To answer my original question: I believe this market was overdue for a correction and we will recover and eventually make new highs for the move. However, I do think it is wise to protect profit margins at these levels if you are intending to switch up your rotation this year.
Please reach out and let me know what your plans are for this year. I’d love to hear from you and get your thoughts. The best way to reach me is by phone at (309) 454-9270 or send me an email at strainor@agmarket.net.
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