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Outlook: High Prices Ration Use

August 25, 2012
By: Bob Utterback, Farm Journal Columnist

Normally the last days of summer are for vacations and relaxation before fall starts. This year, however, will go down in the record books as one with the biggest swings in corn and soybean conditions for the Midwest. I think one of the measuring sticks for a drought is how far the supply is below the 10-year trend line. The August USDA supply and demand report gave us an indication of how bad it is—corn yields of 123 bu. per acre and soybean yields of 36 bu. per acre. That has to be a surprise to the trade. The issue now is how much more they will drop. I expect corn to drop below 120 bu. per acre and soybeans to remain close to the August estimate.

How high will prices have to move before usage is rationed? There are rumors that politicians are talking about reducing ethanol mandates. It sounds good for the consumers back home, but they don’t understand that reducing mandates will help the livestock industry and hurt the corn and soybean producers. Corn and soybean growers need to stand together now to help each other and not allow short-term programs to destroy their long-term demand structure.

I have total faith in the economic system that gives rise to the famous saying "The best cure for high prices is high prices," which leads to the bear’s battle cry, "Short crops have long tails!"

Tell your political contacts, "Thanks, but just leave the market alone and allow it to work!"


Sales index:

10 = Excellent sales opportunity

1 = Excellent buying opportunity

Corn: 10

This is the first time I’ve put a 10 in the sell ranking. Conditions are developing for a long-term top in the corn market. My only concern is that the 2012 high will not be like the 1988 high, where prices topped out in less than three months. I would contend we are going to see a pattern much like that of 1996, where it took almost six months to confirm a high. I expect the final high will be put in by an exceptionally strong cash market and more acres in 2013.

When will the high come? Anyone who has unpriced 2012 inventory is in the driver’s seat. Remain unpriced as long as December corn can stay above $7.65. Obviously, this floor should be moved up as the market rallies, but give the market room to work. It would also be prudent to remain long the basis this year because cash will likely be tight, with average yields below 123 bu. per acre.

Before Thanksgiving is a good bet for the futures high to come, but next spring for basis. Then we have to watch winter weather conditions. If moisture returns to the Midwest, the high will be confirmed; but if dry conditions persist, expect new highs next summer on extremely tight stocks and concern about next year’s crop.

The key point is that this market will be more active and violent the higher it goes. Once you are satisfied with the price, take it and move on to 2013. Don’t speculate and try to buy back at these price levels.

I’m already working with producers to develop a plan to lock up a price in excess of $7 for their anticipated 2013 crop and $7.50 for their anticipated 2014 crop, with limited margin risk exposure if a weather event occurs next year. You might ask, Why not wait until I know I have a crop? My answer: Once the uncertainty is gone, so is the good pricing opportunity.

To get started on 2013 marketing, it is critical that producers work hard right now to lock up their input costs for 2013. Throughout the years, I’ve learned that it is almost impossible for producers to sell a crop if they don’t know what their input costs are—so get it done.

In the future, I will discuss how to use spreads and short put strategies to enhance the core selling prices and achieve returns on investment in excess of 35%. It’s an exciting time for producers to ensure profits for the future. Long live the bear!


Beans: 8

The world soybean stock situation is possibly even more dangerous than the corn situation. With the short South American crop and the confirmed drought damage to U.S. soybean production, the price impact on ration usage could be significant.

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FEATURED IN: Farm Journal - September 2012



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