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Outlook: Be Ready to Adjust

January 30, 2013
By: Bob Utterback, Farm Journal Columnist
bob utterback

While technology has improved farm production capabilities, we all know Mother Nature often trumps the best laid plans. After a historical drought, grain producers are asking, "How do I strategically price my anticipated 2013 production?" and feed buyers are asking, "How do I lock in my feed needs?"

Before we can formulate a plan of attack, here are five points to ponder:

1. Concern about the fiscal cliff has subsided for now. However, there’s still anxiety about the long-term health of the domestic and global economies due to growing government debt worldwide. Interest rates will probably not impact prices in 2013, but it will in 2014 and beyond.

2. We have limited inventory in the bin unpriced. Most producers will wait until summer to sell, likely affecting the basis and spreads rather than flat price. Old-crop corn and soybeans will drive the market. If no weather problems develop, exposure in basis and spreads must be managed.

3. High prices have significantly affected export demand, but domestic usage by livestock and ethanol has been surprising. All grain prices will be impacted if any significant downtrend in meats develops.

4. Eyes are on export markets and their need for grain. USDA’s drop in exports in December makes any unexpected surge in exports this spring potentially bullish for old crop.

5. It looks like South America is on track for a decent crop. In the U.S., subsurface moisture is low. Without snowfall and rain, significant yield impact could occur.

Right now, both the bulls and bears have strong arguments for their position. I expect this market will remain as is until spring. When summer comes, it could get wild, which means controlling risk exposure will be imperative to long-term survival.

Pricing strategy. Basis levels should remain extremely tight and bull spreads should dominate in corn first and soybeans second. I know I say it often, but if any yield reduction event occurs in June or July, prices will violently react. Equally, if corn and soybean acres are at the high end of trade expectations and we harvest normal yields, prices could fall below the cost of production.

In light of the variability of the market, I suggest some level of crop insurance to put a floor under the market. How can you not afford to spend a few bushels per acre in corn to assure you’ll be farming next year?

Second, with profitability still high for corn and soybeans, expect acres to increase. With that in mind, start scale-up selling if November soybeans get above $13.25 and December 2013 corn gets above $6.10, but do so in a way that allows you to participate in a summer rally if a weather event occurs. This means that selling futures or cash is not recommended until after July’s supply and demand report for corn and August’s for soybeans.

The problem with waiting to price this long is it’s either 100% right or 100% wrong. To remain flexible, lock up a floor by using a long put if the market reaches your target prices. Buy deep-in-the-money puts to reduce the time value cost. If risk management is understood, sell old-crop, deep-outof-the-money puts to help offset the time value decay.

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FEATURED IN: Farm Journal - February 2013



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