As I write this in mid-October, March corn futures are trading at $3.30. Only one month ago they were at $2.55. If anyone had suggested corn prices could rally 75¢ or more during the height of harvest, they likely would have been locked up.
This is an incredible market, which is a strong indicator it's going to be a volatile year in prices. What looked like a good deal for marketing corn and soybeans two months ago doesn't look like a good deal now at all.
With strong exports on top of the enormous increase in corn demand for ethanol plants, every grain buyer in the world is inventing new contracts and “gimmicks” to get you to commit your corn to them. As a rule of thumb, if it looks too good to be true — it probably is.
For example, there's a new contract floating around whereby buyers will guarantee an average of the high tick of the daily price range over a given period of time on ⅔-¾ of your production and the remainder priced on the top tick of the time period. Sounds great — but is it?
Let me give you an example. With extreme price volatility of recent weeks, the average daily price range for corn will be much higher than typical. Let's assume that over a year the daily price range for corn is 3¢/bu. and also let's assume that a buyer of grain offers you a contract where two-thirds of your corn will be priced at the average of the high tick of each day. And also assume that the remaining amount of your corn may be priced at the high of the pricing period. What does the average producer think he's really getting under this contract?
For one, if you get the high tick of each day and your neighbor gets the low tick of each day and the average price range is 3¢, at the end of the year your average selling price (on that portion) is only 3¢/bu. higher than your neighbors.
More important is to recognize where the corn market spends the majority of its time. Remember the old saying — “The corn market will give you six months to sell the bottom and six minutes to sell the top.”
On average, corn will spend at least two-thirds of its time in the lower half of the annual trading range. This means that in a normal year, under the terms of the agreement, you would be nearly guaranteed that two-thirds of your grain would be sold in the bottom one-half of the range.
Average in the remaining portion of your grain at the top of the marketing period and your average price might be okay.
While this type of contract is acceptable on part of your production, overall results will not likely meet expectations.
This year is going to be wild. I believe the odds are high that the corn market will make its annual high before we go to the field this spring. Remember, markets are anticipatory and this one will anticipate the need for more corn acres and will make a blow-off top sometime this winter.
When looking at grain contracts in such a competitive environment, beware of tricky names and guarantees. Some of the contracts are very good, but still take management on your part. Very few of these contracts can be put on autopilot. Use a calculator, piece of paper and pencil to do “what if” scenarios under various price movements.
No one has a crystal ball telling where prices are headed in such volatile times. But before putting your signature on a dotted line, have an understanding of what your outcome will be if the price of corn are $4/bu. or $2/bu.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.