'Big-bushel speculators' have leveraged December corn futures bids to a basis position seen only twice in the last 20 years, according to grain marketing economists. At last report, one speculator in particular - Big Index Funds - controlled about 1 billion bushels of corn in futures positions. That's almost the entire carryout for this year's crop.
"The (current) cash-grain market has disappointing prices due to weak or wide negative basis," explains Melvin Brees, economist at University of Missouri's Food and Agricultural Policy Research Institute. "Meanwhile, December futures prices at the Chicago Board of Trade are high, something rarely seen after harvest."
"You never see these high prices at harvest time," says Abner Womack, co-director of FAPRI. "It's most unusual to have this much optimism in the futures market."
Remember, futures market speculators have no intention of taking delivery. Their goal is to cash in (and out) on the rising demand for ethanol and biofuels.
"Fund buyers don't pay much attention to the fundamentals of the grain markets," Brees adds. "If they become disillusioned, that money can leave the market quickly."
The most recent USDA crop outlook projected 1.1 billion bushels of corn in stocks by next year. That is based in part on growing demand for corn to convert into ethanol and increased export demand.
Take the price, but protect yourself
Womack says farmers can use the optimism brought to the commodity markets by the outside investors. If you consider selling via the futures, have grain or a good prospect of a crop to protect your hedge.
"You have to study the market to figure out how to get a price out of it," he adds. If you don't understand it, talk to someone who does.
Brees notes that selling futures contracts can require farmers to pay margin calls when the price changes. Therefore, he recommends using "puts" and "calls." These are options to sell or buy grain contracts.
"When the futures market was at $2.80 per bushel a 'put' costs 24 cents," he adds. "That gives you an option to sell at a future time corn for $2.80. If the cash price for your grain at market time is less than that, you collect the difference."
Womack cites another example. "You can go into the market and buy a December 2006 'put' at $2.50 for a dime. That locks in a price on the low side. If corn goes below $2.40 you get your dime back, and start making money as the price drops.
"If the price goes higher, fine, you sell your corn at the higher price. Although you lose your dime, it was cheap insurance," he explains.