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The Fall/Winter Range?

Published on Thursday, October 24, 2019

China or no China?  Good yield or bad yield?  Big acres next year or managable?  More acres to be lost this year or is USDA right?  Strong feed usage to continue?  What about the poor profitability in Ethanol?  In all of this conflict, markets are sifting for direction.  However, will there be a definitive direction that leads us forward?  A quick study of history makes some suggestions.  See Weekly Corn Chart.

Looking back in recent years, many fall/winter price movements are defined by quiet, steady, sideways trade with perhaps one moment of excitement that comes on either side of the new year.  The sideways trend tends to span a 20 to 30 cent price region.  It often begins in Oct/Nov and runs through March/April.  The price range itself is influenced by the degree of supply that is carried over from one year to the next as we go through the current year's harvest.

Following that line of thought, you'll notice the generally declining range of price as we moved forward into the fall of 2017.  The 2016/17 marketing year (Sept 1, 2016 to Aug 31, 2017) produced a 2.293 bbu ending stocks figure, the largest that has been realized in any maketing year since 1981.  Both before AND since that time, ending stocks have been in a steady decline, giving lift to prices ever so slightly from year to year.  So what range would be acceptable this year?

Often, how we leave the fall is how we enter winter and spring.  By way of futures prices, the nearby contract is December.  Taking a look at that contract closely, you will see how tightly that contract traded through last winter.  It was essentially trading a 10 cent range that spanned from $4.05 down to $3.95/bu.  $4.00 served as a pivot point in that trade.  As psychologically respected as $4 corn is throughout the farm community, this comes with little surprise.  As we worked through the year, $4.00/bu served as an ingnitor for movement both above it (Mid-May) and below it (Mid-Aug).  More recently, the market made a test of $4.00/bu and failed.  For now, it appears that this will serve as the top side of any winter range that may try to form.

So what about the bottom?  In its run to $4.00/bu the market encountered another point of resistance at $3.75/bu.  You will notice that the same number served as approximate support throughout spring as the market was searching for its low.  Once this price was breached in its recent move higher, it has yet to be tested.  Do not be shocked if that happens sooner than later.  If it holds, that may very well define the bottom of this same winter range.

Obviously, there is much guessing and little known about next year.  However, given all of the conflicting variables that led off this letter, prudent risk management should live in and around this range.  Strong basis levels in many parts of this country invite cash sales on unpriced bushels.  Sales targets should also live near the top side of this range ($3.95) for anything that cannot be priced.  New crop should be included in this conversation as current values are just 15 cents from their high.  New crop put options are offered at great values ($4.00 puts for 21 cents).  While risk may be limited today, any number of things can change in the months ahead.  Give us a call to sort through an appropriate strategy for your operation.