By Matt Mattke
After having dealt with $4.50 to $8.00 corn over the past year, a $3.25 price likely looks more than just a little bit attractive to the majority of dairy producers out there. And especially with price risks remaining due to the corn crop being a couple weeks behind in development, it may be very tempting for a producer to lock in a $3.25 price for the next twelve months and be done with it.
With the horrible milk prices producers have had to endure over the past nine months, we believe a more strategic approach needs to be implemented when pricing this year’s corn feed. If corn continues to fall and goes from $3.25 to $2.25 that is a lower cost that the majority of producers cannot afford to miss out on. While fundamental chatter such as a weak US Dollar and frost risk could suggest corn prices are at a low, we see the technical chatter on the charts painting a different picture.
First, intermediate and long-term technical indicators we monitor remain bearish and suggest further downside in corn. Second, chart ‘A’ below shows how every bull market that has taken corn above the $3.00 level has resulted in a subsequent bear market that has taken corn back to $2.25. If milk prices can go from $21.00 to $9.00, corn can definitely go from $8.00 to $2.25.
While we see the corn charts pointing towards the $2.25 level these are still extremely volatile markets, and developments could occur that could reverse the current trend. Thus, here is a strategic way to approach pricing your feed corn for this year.
The first step is to pick an ideal purchase target; we’ve chosen $2.25. Next, pick a safety target or “stop” above the current market price. This price should be a price level that is above downtrend resistance on the charts, and should be a price level that corn should not reach unless the trend is changing from lower to higher.
In chart “B” downtrend resistance off of the June and August highs is our safety stop and it comes in at the $3.48 price level. So as long as the corn price is below $3.48 we are going to aim for the $2.25 target to buy the next twelve months. However, if the corn price is able to break through that $3.48 downtrend resistance then the trend could be changing and higher prices could be coming down the road. So if the corn price closes over $3.48 before hitting $2.25 then corn needs to be purchased. At that point the next step in the decision process would be does this purchase need to be covered with put options?
Overall, a strategic approach to purchasing corn is to have a Plan A, while also having a Plan B to fall back on in case the market doesn’t offer the opportunity originally sought.
Stewart-Peterson Market360® Adviser
Web site: www.stewart-peterson.com