Decisive Marketing

cover_dec09Many factors make grain marketing complicated and
risky at this time.

By Melvin Brees

Will uptrending corn and soybean futures prices continue moving to new highs? Or are the markets heading toward a collapse, eventually setting new lows? There are market analysts predicting each of these extremes with plenty of analysts at various places somewhere in between. Strong demand, the potential for further production losses in a late harvest, strong export markets, a weaker dollar, higher energy prices, investment funds adding to long futures positions and a number of other factors support the arguments for continued uptrends in corn and soybean prices.

But record crop yields, large total crop production, more than adequate ending stocks, financially squeezed livestock producers, expected production increases in South America, large world wheat supplies, economic worries and other fundamental factors suggest that considerable downside price risk exists. A number of factors influence prices and, on any given day, it is difficult to tell which factor(s) is driving prices. The situation is complicated and risky, but marketing decisions must be made. December 2009 corn futures prices have been in an uptrend since the September low near $3.05 and are currently near $4.00 per bushel. This results in cash prices that are in the upper one-half of USDA’s projected 2009-10 corn price range from $3.25 to $3.85. But, higher prices may still occur, and these prices are still significantly below the June high of $4.73 for December corn futures.

What About The Price Trend?
Corn and soybean prices are in uptrends. There is also the old market adage, “the trend is your friend.” This refers to the expectation that the direction prices are moving (the trend) suggests the direction that prices will continue to move. Those who follow trends, also look for market signals that the trend is changing or reversing. Selling based on the market trend can be accomplished with a variety of strategies, such as scale up selling, price target and price traps and trailing stop.

Scale up selling can be accomplished in a number of ways by selling predetermined percentages or amounts of the crop as prices move higher at predetermined price intervals. Some advocate making sales of increasing quantities to increase the average price. Others prefer to spread sales evenly. For example, a producer could make a corn sale now and then add to sales at each twenty-cent price increase. However, the uptrend may reverse before many sales have been made, and the producer is left with most of the crop unpriced as the market collapses. Or, an extended uptrend may continue long after the producer has sold most of the crop with price triggers set too close together at lower prices.

Price Targets And Price Traps
Using price targets is similar to scale up selling in that sales are made as prices move higher. The difference is the price targets are specific upside price objectives, and price traps are lower price objectives. Price targets are often determined by previous market highs, other chart resistance prices or specific profitable price goals. Sales are made as the price objectives are triggered. Price traps are lower-priced sales targets that serve as downside price protection. If the uptrend stalls and prices decline, the objective of the price trap is to trigger sales at an acceptable price before prices decline further. This type of strategy is more complicated, but it still allows capturing higher prices in an uptrend and provides some downside protection.

Cash bids for price targets and trap prices can often be placed at an elevator to be filled if the objectives are met. The same can be done by placing open orders with a broker for futures sales. Price targets and traps have similar shortcomings on the upside as using scale up sales. On the downside, sometimes prices drop sharply and when the downside price trap is triggered, the actual price may be significantly lower because the market “blew through” the price trap.

The current corn and soybean market price action provides opportunities and risks in uptrending markets. However, not all of these strategies mentioned are appropriate for everyone, and using a market advisor might be helpful. But, the markets are offering profits, and whether sales are made or delayed while following the trend, don’t let prices in the upper one-half of the expected price range get away!

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