by Katie Micik, DTN Markets Editor
OMAHA (DTN) -- A sharp price break is likely to follow the steep run up in corn prices, a pair of economists told DTN.
"Nobody knows where those highs will come," Purdue ag economist Chris Hurt said. "The market will form some kind of inverted V-top, a sharp run up to the top and then a sharp break from the top. Picking where the top peak is? Impossible."
In classic drought markets, the market tops when the drought hits its most severe point, typically a very bullish day, Hurt said. With no rain in sight for much of the Corn Belt, he doesn't think corn has reached a peak, but he thinks the odds are high that the peak will come within the next 45 to 50 days.
December corn futures closed at $7.4025 on Friday, a 46% increase from the June 15 close of $5.06, as searing heat and drought disrupted corn's pollination, sapped its production potential and dashed hopes that a large crop would replenish short supplies.
The remarkable rise in corn prices shows just how quickly a drought can pull down a farmer's prospects, said Chad Hart, extension economist for Iowa State University. "Prices will continue to go up as this crop deteriorates. Therein lies the big rub here," Hart said. "As exports diminish, it should slow down that (price) growth, but until Mother Nature's done with it, it's hard to tell where this thing's going to top out at."
While diminishing demand may slow corn's meteoric rise, DTN Senior Analyst Darin Newsom noted that noncommercial investor interest is thinner than in previous rallies, less than 200,000 net-long positions last week while there were 379,000 contracts in February 2008.
While Newsom thinks there is still room for investors to add to their position, the market is already trading in the upper reaches of its historical price range. "Given the high volatility in the market and the high price, investment traders will likely not be interested in buying, limiting the scope of the 2012 rally," he said.
That also means there won't be much of a cushion once prices hit the demand-destruction threshold, historically $8.
"A lack of noncommercial buying interest could create a vacuum market: a situation where the market could spike lower due to a lack of buy orders once the commercial selling begins," Newsom said.
RALLY PROVIDES MARKETING OPPORTUNITIES
For farmers with bushels to sell, Iowa State's Hart said farmers are "staring at some of the best prices they've seen in quite some time."
He thinks corn will test its high just shy of $8 and possibly stay over $8 for a little bit. Newsom agrees. But in this market environment, Hart warns that farmers need to be cautious about not getting into an oversold position.
"I want to watch and make sure that I'm aggressive in forward contracting this crop, but I don't want to get out ahead of what I know I could either produce or what I've got insured," Hart said. Farmers should pencil out the maximum bushels they can market and Hart suggests leaving a cushion.
Once that number is known, he suggests spreading out sales. "Maybe I'd sell a little now, wait a couple weeks to see if we add a little more run in the market. If it deteriorates, sell a little more there to try to ride this bull up."
Newsom suggest farmers sell small percentages of their crop at a time into the rally, hopefully avoiding the downside that will follow the expected spike top. Hurt said farmers need to not focus on selling corn at the peak. Rather, knowing that the peak is likely to fall within the next 45 to 50 days, farmers should instead focus on their average sale price. They want it to be close to or higher than the average price of corn in that time period.
It may be worth asking your buyers if they'd be able to set up an average price contract for a 45- or 50-day time frame, he said.
TO STORE OR NOT TO STORE, THAT IS THE GAMBLE
In a classic drought market, the peak is followed by a long, slow drop to the harvest lows of the next crop, in this case 2013's corn harvest. The forward curve of futures contracts currently reflects this trend, and Newsom suggests farmers feed the inverted market instead of storing grain.
"How in the world do you store corn by putting it in the grain bin at $9.50 and then sell it for $9 for at Christmas?" Hurt said. Indiana's corn looks so poor, he doesn't think $9 to $10 cash corn is unreasonable to discuss.
Hart agrees that the cost of carry and maintaining quality are risks, but noted that holding your corn isn't necessarily a bad strategy because storage has historically paid off.
"When you look at this market, it was already in a tight situation and the drought just exacerbated that. So the market wants bushels now," he said. "It's going to want bushels later, but right now arguably, the nearby demand is enough to hold prices up high. I think for those that have the bin space, it's not necessarily a bad play to hold your corn (for) later on."
If a farmer does decided to store grain this year, Hart suggests putting in a price floor, either by hedging directly with futures or by using put options. A slightly out-of-the-money put at the high $5 or low $6 price level would provide fairly inexpensive price protection.
The bottom line: "Short supply markets are like forest fires," Newsom said. "They burn fast and end quickly."
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Posted with DTN Permission by Haylie Shipp