As is typical every planting season, farmers are worrying about how fast they get their crops in the ground and how good the stands are. As spring turns into summer, they will worry about how much heat and rain their crops get. Long-range forecasts indicate the current weather pattern is not losing strength fast enough and the risk is increasing that some type of yield reduction event could occur this year. With the concern about lack of demand rationing, anything other than above-trend-line yields could entice the market to keep a significant weather premium in place until yield is more certain and some demand rationing has occurred.
Even with all of the current uncertainty, producers should plan for an average crop and defend against the exception. This is a wise course of action this year and down the road as well. High profits will motivate the corn acres to get planted. A significant amount of fall tillage will put producers in a prime situation to get the crop in on schedule, and end users will be motivated to ration usage until the new crop comes on board. The only concerns are how quickly the bull trend will reverse and how violent the transition will be.
As we know, the recent violent correction off the March supply and demand report has spooked many of the bulls because of concern in regard to demand.
I believe the fundamentals that have pushed the market up so hard are still in play. Because of building demand prospects with China and India and our own domestic ethanol corn production needs, producers need to re-examine their selling methods for the next two marketing seasons. I know that most producers focus on selling cash inventory because they don’t want to deal with the "evil" futures or "costly" options. However, I must remind everyone that the producer who sold $4 to $5 corn and $8 to $10 soybeans lost a lot of opportunity now that corn is well above $7 and soybeans are above $14. Simple cash sales can be a very expensive way to sell inventory if one is not careful.
Until demand and supply are realigned, producers need to be very careful in giving up control of their inventory. Setting floors is an excellent approach, but producers should have a game plan for participating in upside potential. As I see it, the big questions now are:
- What should you do with unpriced old-crop inventory?
- When and how should you sell new-crop inventory to capture profit but avoid excess cash-flow exposure?
- When should you consider multiple-year sales?
- What can you do about inputs?
In the coming months, I plan to offer answers to all of these questions in this column, on the "U.S. Farm Report" TV show and on my Outlook Today blog.
Sales index key
|Excellent sales opportunity ..... 10
Excellent buying opportunity .... 1
Sales index: 8
Producers need to separate their opinions about the corn market into old crop and new crop. I expect old-crop corn to be extremely reactive to any changes in supply. The chances are better than average that lead-month futures will need to move above the 2008 numbers to ration usage during June and July. At the same time, I expect, the new crop will be reacting to major increases in planted acres, making it difficult to move above $6.25 unless trend-line yields drop below 162 bu. per acre.
Three strategy options. Handling old crop and new crop differently requires two separate strategies. Producers have a choice to make: The market has reached a near-term price plateau basis the lead month futures right below $7.50. The recent retreat in prices has producers who are holding inventory in a little distress.
The first alternative is to take the price, clean the bin and start on expected 2011 sales. I know that anyone who is holding old-crop inventory wants the March highs back, but right now that will not happen unless Mother Nature gets nasty.
A second alternative is to go for the final price event associated with a summer weather event. If producers are right, they will be well rewarded. In case they are wrong, the risk should be prices close to the $6 level.
A third alternative is a compromise position: sell inventory now and re-own it in a limited risk call option strategy in the July contract to enable participation in a summer event if it occurs. The best choice depends on each producer’s ability to handle risk—remember, hogs get slaughtered!
- Early Spring 2011