Corn and soybean markets likely volatile in July—be ready

The month of July is one that can bring both angst and excitement to grain markets. U.S. Department of Agriculture reports, crop progress ratings and ever-changing weather forecasts bring price volatility to the corn and soybean commodity complex.

On one hand, the market remains supported by the reality of tight ending stock levels in the United States and the need for a large U.S. crop this summer. After recently talking with clients about old crop bushels on hand, most have very recently “sold out” taking advantage of near $8 a bushel cash corn prices or have less than 5% of their total production on hand. With basis still so strong throughout the Midwest, it also makes me wonder what grain elevators or ethanol plants have on hand for corn in their storage. If they had bushels available wouldn’t the basis levels be wider? For now, the reality is that the U.S. is still dealing with historic tight ending stocks for old crop corn and soybeans.

On the other hand, high prices will ultimately lead to larger production around the world. We are beginning to see potential evidence of that. For example, earlier this spring, the world was unsure how much grain Ukraine would be able to plant, if any, after the Russian invasion. According to a recent report from the International Grains Council, world corn production in the 2022-23 season is now seen at 1.19 billion tons, up from a May outlook for 1.18 billion tons. This slight increase, believe it or not, is mainly based on Ukraine, where plantings exceeded initial expectations. The second crop corn in Brazil being harvested now, has been substantial. This second crop corn will likely be quickly exported to the world, at “just the right time” since U.S. stockpiles are dwindling.

Here in the U.S., if the crop growing in fields right now ends up being “good enough,” that mentality will likely keep prices from making new all-time highs in the short term. Of course, ultimately, weather has the final say. A hot and dry late July and August could zap record yield potential. Or an ill-timed hurricane could hit the southern Gulf shores and shut down exports or slow the harvest. Another derecho storm could wreak havoc on the Midwest corn supply. Or, if August weather is perfect temperatures and sunshine timed with the right amount of rain at just the right time leading to record soybean yields.

Bottomline, most would agree that prices are still historically high. With high prices comes high volatility, and many feel that we can likely see extreme unpredictable corn and soybean price movement during the month of July.

The key is to understand that you can manage volatility by positioning yourself for both higher and lower prices, despite the outlook. The outlook can change daily. For grain farmers, this means forward selling to capture high prices on half your crop. What about the other half? Consider purchasing put options. Puts give you the right (not the obligation) to be a hedger (seller of futures). If prices decline, you will either convert your put into a short future or sell the put back to the marketplace.

What if prices rally? Your puts can lose value, though half your expected production (still unpriced) can appreciate in value. The forward sold bushels cannot participate in a price rally. However, if you purchase call options on those bushels, now you have re-ownership. Call options can participate in a price rally and, if they have value, can be sold or converted into a long (buy) in futures.

The end goal is to position yourself so that, no matter what the market does, you are able to participate on a price rally or decline for all your expected production. This strategy takes management and should be discussed thoroughly with your advisor. Make sure you’re implementing options that best fit your risk tolerances and can complete the job of taming the volatility you are likely to face.

In general, people tend to react as events unfold rather than preplan and prepare for them. With prices at critical levels this early summer, take time now to map out the what-if scenarios, and execute strategy to manage them.

Be ready for anything this summer that could affect the price of corn and soybeans either higher or lower. It seems as though a sense of complacency has hit producer mindset, and that marketing has been placed on the back burner, because “surely prices will stay high.” With the extreme global geo-political drama happening around the world, and the notion that inflation needs to be curbed quickly, there are also outside market influences that could come in and become front and center stage; more than true underlying fundamentals to the grain complex itself.

Editor’s note: Naomi Blohm is a marketing advisor with Total Farm Marketing by Stewart-Marketing and she is a regular contributor to the Iowa PBS series “Market to Market.” She can be reached at [email protected].