Outlook: A Mix of Old and New

  

Corn Old Crop 12345678 9 10

New Crop 12 3 45678910

So far the market is following the short-crop, long-tail price pattern. Since we have extremely tight stocks, lead-month futures have gone premium to the deferred contracts. This pattern is expected to persist into July. On the other hand, the 2013 crop has significant downside risk if we see more than 99 million planted acres and a yield above 158 bu. per acre.

With that in mind, sell expected 2013 inventory in a way that allows flexibility but protects the risk of a major downside price break if trendline yields become a reality. Buy the maximum crop insurance coverage. Price September deep-in-the-money puts when September corn trades between $6.20 and $6.50. To further manage risk, sell out-of-the-money May or July puts to offset some of the time value cost. Don’t sell calls to help pay for the puts until July.

Beans Old Crop 123456 7 8910

New Crop 1234 5 678910

The chance of a solid crop in South America should keep the old crop below $15.50. Granted, demand from China should stabilize old crop prices into July. It’s likely more acres will be planted along with a fair amount of old crop held into the summer because of weather concerns. I see limited potential for November 2013 soybeans above mid-$13 unless yield takes a hit.

Purchase deep-in-the-money puts and roll up if prices rally, but sell old crop deep-out-of-the-money puts for time value decay. Lock up basis for off-the-combine cash sales, but don’t for the bushels that will be stored long-term.

Wheat Old Crop 12345 6 78910

New Crop 1234 5 678910

While we’ll likely see less winter wheat plantings, expect spring plantings to be up if prices rally. Historically, the seasonal pattern is sideways to declining for Chicago July wheat. A 50% retracement of the fall break is $8.50. Weather concerns and the chance of additional feed wheat should help keep the market firm into spring.

Sell on a price bounce due to a winter weather scare. Use long puts to price 100% of a crop above $8.

Cattle 12 3 45678910

The January cattle on feed report was a game changer. Wait on a retest of the recent highs to price inventory. Focus on the December 2013 contract; if it moves back to $150 or higher, scale up your selling campaign. It’s important to protect feed needs until we have a new crop.

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