Be prepared for 'violent price action' during South American growing season, says analyst

What happened

Now that the November WASDE report is behind us, focus will turn to the southern hemisphere, as weather and crop conditions become more critical in the days and weeks ahead. Recent dry weather in the northern regions of Brazil and wet conditions in the southern states indicate the crop is off to a less-than-ideal start. However, during the month of October, weather conditions in South America should be viewed with skepticism, as it is too early to suggest yield changes. As the calendar rolls into November and especially December, crop and weather conditions become more critical.

Despite private forecasters lowering yield projections for both corn and soybeans in Brazil due to adverse weather, USDA and CONAB (the Brazilian equivalent of USDA) kept their production outlooks unchanged from the previous month. Current projections from USDA are for Brazil to produce 163 million metric tons (mmt) of soybeans and 129 mmt of corn. In essence, early in the growing season, government agencies are reluctant to suggest much change. Timely weather, better farming practices, and improved genetics helped to increase yield prospects for U.S. crops after reductions in mid to late summer were forecast due to adverse weather. The November corn yield estimate increased from 173 bushels per acre (bpa) to 174.9; soybean yield added 0.3 bpa to 49.9. The point is that lowering production estimates during the growing season too much can make for upward revisions later. Agencies may work their way toward lower production estimates as necessary, though it will likely be a slow process.

Why this is important

As weather impacts both Argentina and Brazil, changes in expected production will be reflected in price. Though official production estimates have not changed, January soybean futures have rallied from near $12.70 in October to $13.86 as of Nov. 14, likely reflecting adverse weather concerns in Brazil. Export sales have recently picked up as well. This is a potential signal that importing countries are more aggressive as production concerns increase.

From a marketing perspective, it is important to sell price rallies — or at least defend them. If South American weather turns for the better, prices could quickly slide.

What can you do?

If you want to hold beans in storage, consider buying a put option to establish a price floor. If you are selling and you want to maintain ownership, consider buying a call option or bull call spread. Both have a fixed-risk component.

Corn prices are hovering near contract lows. End users who want to guard against higher prices could consider buying cash, buying a call option, or purchasing a bull call spread.

Weather can affect markets and create violent price action. Be prepared. Create a balanced approach to your pricing decisions. Discuss ideas with your advisor to determine marketing tools that best fit your needs and risk tolerance.

Editor's Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.