I enjoyed speaking to several of our Farm Journal readers this winter. It appears many farmers sense a storm is coming; will it be a soft summer rain or a full-blown spring tornado that destroys everything in its path? We need to watch these three dominant macro events for all ag commodities.
1. Weather. I do not have any special skill set to predict the weather, so I leave that up to meteorologists. The impression I’m getting is we have a neutral outlook for the northern hemisphere in regard to El Niño or La Niña. Granted, some parts of the Western Corn Belt are starting out dry, but most of the primary corn and soybean production regions have seen decent moisture. If we don’t have any planting delays, once the crop is planted, the burden of proof for trend yields will fall squarely on the bull. Assume average yields in selling strategies, but defend against weather events if conditions change.
Looking forward to the next several years, however, I agree with weather experts that yield variability will be even greater. Farmers will need extra protection for hedge positions going into spring and summer in order to not leave a lot of price-gain on the table if a yield reduction occurs.
2. Farm bill. Now that the farm bill has finally passed, farmers are trying to figure out what program to choose. When considering your options, pick a program that will give you the most downside risk protection. The farm bill, along with crop insurance, will help put a floor under the market, but you must take advantage of solid pricing opportunities to ensure a profit.
3. Land values. The profit margins we saw in 2003 to 2013 will be very difficult to repeat in the next 10 years. The revenue-to-cost relationship will tighten up average historical levels, which means the current land values cannot be supported. If anyone has land to sell in the next three years, do it immediately. Anyone wanting to buy land should delay doing so as long as possible; build your war chest and only buy if it absolutely fits with your operation.
For now, I recommend farmers grow their land base through cash renting, not buying land. I know many readers don’t like this path, but cash is king and will continue to be for several years. Farmers started to price some corn in January and February, but there is still a lot to sell. With low interest rates and very little alternative places to put money, farmers might as well keep it in the bin and hope for a price event to bail them out. If yields are above 158 bu. per acre and we plant 92 million acres, overall supply will be adequate to keep carryover very close to 2 billion bushels.
April to May will be a critical time period. If the crop gets planted, it will be extremely difficult for the market to rally unless hot and dry weather sets in throughout the Corn Belt. Lock up the basis for all old crop and off-the-combine cash sales immediately and then price out the 2014 crop as soon as it gets planted this spring.
New crop corn. If you followed my recommendations, you are already heavily sold in artificial puts and have all the benefits of a put structure without the time-value cost. On 2014 new crop, I would not want to be net short futures or straight cash sales until we get past the June USDA Supply and Demand Estimates report.
- March 2014