Staying Ahead of the "Herd"

by Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

We’re in some interesting times in agriculture. Volatility has become commonplace. We have seen some turbulent futures and basis moves over the last year also. Counter seasonal rallies and short lived weather scares have kept the market moving. The grain markets have been appropriately named – “the futures market”. The need for grain or lack of is always reflected in grain pricing. Years of large carryout and lack of demand create a rather quiet market with sideways movement. Fear of supply disruptions, usually caused by weather, can create volatility as the crop year unfolds. If world or U.S. carryout supplies remain adequate, the trade relaxes, and prices drift lower. In the last few years we have seen prices react rather unusually. Demand for corn as ethanol steadily jumped from 1 billion bushels in 2002 to just short of 3.5 billion in 2007. Although the growing, hence upcoming demand for corn appeared evident, price reaction came early, with corn moving higher during the onset of the 2006 harvest. Prices stayed strong into February of 2007.

It appears the market has the ability to entice farmers into doing what it wants. The corn market rally into February of this year will attest to this. February is usually a quiet sideways trading month, but not this year. Winter is planning time. Often planting decisions are made December through March. It seems the market is well aware of this. Record high values for December corn enticed farmers in the U.S. and Canada. The American farmers planted an astounding 92 million acres of corn. The size of the corn crop is yet to be determined, but other than some small setbacks, early yield reports are coming out “better than expected” in many areas. The market accomplished what it set out to do. When corn rallied, beans did also, moving up through $8.00, but corn won the acreage fight. Projected corn carryout shrunk to 752 million bushels in the January, February, March report, creating visions of $5.00 corn with any kind of weather problems. The bullish ground work was laid.

But it now appears the U.S. has enough corn presently to get through to next spring. Prices have softened $1.00/bu. off of their highs. Yield reports have been favourable. Soybean acreage has shrunk substantially, hence causing concern over any yield shortcomings. The need to have an excellent crop in South America, coupled with additional acres in the U.S. next year, has created a premium in the soybean market. Wheat prices “through the roof” are no doubt buying acres. How do you manage your marketing in this extremely volatile, unpredictable environment? As always, open orders for cash and option hedges will enable you to attain price protection and reach cash goals. If you’re using put options to establish a floor price, they can be “rolled” up under the market. Put options will enable you to establish a “floor” price with no delivery commitments. Elevated participation by speculative money has increased volatility and created more uncertainty. It appears as the next marketing year unfolds, given current fundamentals, the market could send planting signals. When you “buy into” the excellent prices and make planting decisions based on current values, make sure you have delivery prices locked in at the same time. These are exciting times. Demand locally and globally for grain should present opportunities as we go forward. The last four years have been extremely tight for Ontario farmers. Bullish enthusiasm coupled with a desire to “catch up” with such attractive prices may tend to sway you away from your sales goals. The corn market activity over the last year should serve as a good example of what can happen as crops vie for market share. The most interesting challenge we have is the ability to “stay ahead of the herd”. Watch for signals from the “trade”. When prices rally on “nothing” (future concerns not actual shortfalls in production) take a hard look at price protection. Looking ahead coupled with a proactive approach will reward you.