If you are still holding on to old-crop soybeans or corn, you may be wise to line up some trucks, crank-up the augers, and begin unloading your grain bins, according to Brian Doherty, a commodity trader with Stewart Peterson.
Doherty, who provided his market outlook on corn, soybeans and wheat to growers across the Sunbelt Dec. 13 at the monthly meeting of the Ag Marketing Network conference call, says that holding grain in the bin is probably the most speculative position a farmer can take in the grain market.
“I think farmers do themselves a favor by being at least 50 percent sold in the harvest, and then trying to get that last 50 percent sold within the first three months of the year,” he says.
Doherty says he would be particularly aggressive in moving soybean inventories right now, before storage costs further eat into any potential profits.
One strategy he recommends is establishing a fixed risk position by buying a March futures contract at the money, and then purchasing a $4.40 put against that futures contract.
“You've fixed your risk yet still have flexibility if the market moves up or we see South America stub its toe on weather, and all of a sudden we put on 50 or 75 cents real quick,” he says. “If the market heads south, the cost of that strategy probably isn't going to cost you a whole lot more than the cost of holding your beans in the bin, but you've taken away the market risk.”
For those soybean producers who want a more conservative, long-term marketing strategy, Doherty recommends buying July call spreads. “In that case, I'm going to buy an at-the-money call, and sell either four or five strike price out-of-the-money calls against that.”
Doherty also recommends moving any old-crop corn inventory. More specifically, he advises growers holding corn in the bin to buy a July $2.30 at-the-money call option. “You've got six months to work with that, and you no longer are subject to market risk, storage risk or some market rally basis risk.”
In some areas of the country where the basis isn't tight, he says, you may want to examine the carry charge in the market, and possibly forward contract for sometime shortly after the first of the year. “If you're going to pick up a few cents, forward contract and buy it back with a $2.30 call,” Doherty says. “That $2.30 call is roughly the cost of storage and grain. So you are fixing your risk, and participating in the market if it moves up.”
Doherty isn't forecasting any immediate upswing in the corn market. “We're going no where fast in corn,” he says. “There's just not a perception right now, either domestically or on the global front, that we're going to all of a sudden run out of corn. There's also not the perception that we're going to shock the supply side of things.
“The kind of shock that moves the market generally occurs because of an unexpected weather or news development. We're entering a window of time right now, where we're not likely to see that,” he says.
On a more positive note, Doherty says the corn market is trying to build a base, which means the corn market should perform more “normally” in 2002.
“We have some fundamental numbers that are supportive for corn,” he says. “I think people will be disappointed that the market is not going to rally very quickly. But, I do think we're going to climb 10 to 15 cents over the next few months, and maybe by as much as a quarter into the spring.”
Doherty is also betting that China will remain a factor in the corn market. “China has been cleaning out their bins for the last year and moving all of the poor-quality corn they can move.”
However, he doesn't recommend that corn growers make any marketing decisions based on whether or not China will be in the market for corn. “I think they have a need and will be in the market for corn, but I'm not going to put all my eggs in one basket, especially if I'm a producer with a lot of inventory.”
The soybean market has potentially the most explosive outlook of the grain commodities, according to Doherty. “Beans are kind of on the teeter totter right now, and we're on the verge of looking ugly on the charts.”
Despite the fact that the most recent USDA report confirmed a change in ending stocks, the market trended negatively. “The ending stocks trend to me is the most critical pattern when it comes to price outlook. We put the skids on increasing ending stocks with this last USDA report and yet the market moved down on the news,” Doherty says.
He compares the current soybeans market situation to a game of tug of war. “We've got outstanding demand right now and we've got outstanding weather in South America, but the market has failed to rally on potentially positive news or on actual news. That's disconcerting. We're sitting sort on the edge right here, and if South American weather continues to run as good as it has, we could move down another 40 or 50 cents into the South American harvest.”
“If I'm a producer, I don't want to get stuck with a lot of inventory if the South American weather continues to roll along because the perception is we're going to have beans coming out of our ears. In pricing, perception is everything,” he says.
However, a couple of weeks of adverse weather in South America, Doherty says, could quickly add 50 to 75 cents to the soybean market.
Due to the uncertainty in the soybean market, Doherty encourages growers to market defensively by selling any on-hand inventories on the cash market and then utilizing options to “buy back” the crop.
Like soybeans and corn, perception is playing an important role in the wheat market. The market, he says, is “languishing” despite a run of positive news that in a more normal market environment would generate buying interest.
“The world just is not stepping up to the plate and buying inventory,” Doherty says. “We're not seeing any of this long-term buying despite what appears to be good value. You've had a market that dropped 20 cents when winter wheat crop ratings went down four out of five weeks. This market doesn't even care apparently about crop ratings in the fall.”
And, like the corn and soybean markets, Doherty says, there isn't any real perception that we're going to run out of wheat. Because we haven't seen any significant crop loss in any part of the world, the speculative interest hasn't been there to drive the market upward.
What's going to change the environment and allow the wheat market to rally?
According to Doherty, it's going to take increased exports, weather-related production problems, a weakening of the U.S. dollar from its current levels, and the perception that we're going to get tight on supply.
“Rallies, time and time again, of 10, 15, or 20 cents have proven to be selling opportunities in this market. Again, I'm going to be smart and try to sell in the cash market during these rallies given the current environments that we're in,” he says.
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