Wednesday, June 01, 2011
Corn Marketing Without BefuddlementTweet
So you are befuddled, hornswoggled, and otherwise confused about the markets. All of your buddies agree they are, too. But your spouse says that is no excuse; there are bills to pay, so get busy cashing in on some of those premium prices you have waited so long to see. Pulling the trigger is tough because you don’t want corn prices to go limit up the next day. Well, there are ways to cash in on good prices and regain some of the sleep that you lost not knowing whether to sell.
The first day of your high school history class the teacher probably said “Those who fail to learn history will be forced to repeat it.” The double meaning that was being offered can, in part, apply to the corn market, since there is a lot of history there, and if you learn that history, you will not be forced to suffer the mistakes. That is the contention of Iowa State University ag economist Steven Johnson, whose recent newsletter will be of value to befuddled corn marketers. Johnson quotes a study of 35 years of price movements of the December futures contract to determine a seasonal trend for monthly highs.
During that time, there were 19 years when December corn futures were higher in June than in January, and 17 years when July prices were higher than the following December. Only 9 of the 35 years saw a high for the December contract occur between August and January. The highest prices in 75% of the years occurred between January and July 27. When you look at the recent past, June has seen the high for the December contract in 3 of the past 4 years, with November 2010 being the exception.
Armed with that information, which is front loaded with June and July being prime months for highs in December corn futures, could a marketing plan be developed that will spread risk, yet take advantage of your newly found secret information? (The answer is yes!) And Johnson says the way to do it is to sell a portion of the new crop, based on the probability to have the high price for the year.
Those months with the highest prices are January, March, April, May, June, July, and November. Since you know that June and July are months with a better chance for a high price, a greater percentage of your crop would be sold in those months. The way Johnson calculates it is to sell 18.5% of your crop in each of those two months. The next two months with the greatest chance of a high in the December contract are January and March, so Johnson allocated 14.8% of your crop in each of those. The remaining months of April, May, and November would each get 11.1% of the crop sold. If that process would have been followed this year, your average to date would be $6.40 per bushel.
Such a weighting of the sales is designed to take advantage of the historical probability that sales would exceed the average price for the year. And Johnson says the basis for the contracts would still have to be calculated for the actual average cash price.
When you study your history, as your teacher would have suggested, Johnson says you would find 2011 to be similar to some other years when highs were set from January to April. Those included 2008 (high in June), 2006, and 1995 (highs in November), and 2004 (high in April). With prices continuing to increase, Johnson says parallel years were in 1988, 1990, and 1996 when the highest prices were seen in July. Doubts are being cast that the $6.8375 price in April and the $6.84 last week will be the highs for the year. Johnson says in the past 35 years, only 1 of the 7 years that had higher highs each month through May set its high in April.
Without seeing his price charts, Johnson suggests you consider the line graph of December contract highs for the past 20 years maintained by the ag economists at the University of Minnesota. He says it shows the obvious tendency for the years’ highs to occur during the March through June period. That is an obvious time that is stressful to the market because of planting, emergence, and pollination.
With the tight corn ending stocks forecast for both the 2010 and 2011 crop years, expect extreme price volatility in June and July. However, trying to guess the month with the highest price would be difficult. Consider spreading out your new crop sales over several months. Incremental sales during the first 7 months of the year (January through July) would tend to have a higher probability of high futures prices.
Posted by Stu Ellis on 06/01 at 12:00 AM | Permalink