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Utterback: What Will Spring Bring?

March 15, 2013
By: Bob Utterback, Farm Journal Columnist

Farmers are anxious to begin spring planting, but "hope" is now the predominant emotion driving grain marketing plans. Farmers hope the market will recover enough to make storing crops look good. They hope December 2013 corn and November 2013 soybeans will recover to profitable levels. They hope for good spring planting and normal rains.

bob utterbackThe problem is that the hope for higher prices lies firmly in weather problems, which implies someone has to get hurt. In the recent baseline 10-year projections from USDA, a bleak picture emerged, suggesting if we move back to trend line yields prices will significantly drop during the next two marketing seasons.

This is due to demand going flat and acres increasing globally. The big uncertainties are yield and weather. As we get into May, if prices break out to the upside, sellers need to be extremely careful about cash flow exposure. Equally, if the market breaks to the downside, bulls need to be cautious with cash exposure.

By the time you read this you will have made your decisions about crop insurance. I hope you took advantage of it to ensure a safety net.

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The February correction took the wind out of the sails for the bulls near-term. The good news is this correction could help lower prices to levels where we can activate solid domestic and possible export interest. This will take a little time to develop, but we will also be closer to the spring weather uncertainty period. Weather and planting concerns should start to surface in late March and potentially offer a solid technical recovery in December 2013 corn prices. I believe a move above $5.90 will be tough, though.

Farmers should buy $1+ deep-in-the-money September puts if and when December 2013 corn trades close to the $5.85 to $5.95 range. To help offset the time value cost of the puts, sell deep-out-of-the-money May or
July puts. To me it’s all about getting a floor under the market and being in a position to improve my bottom line if the price rallies. I prefer to use the put roll-up strategy rather than the buycall-and-sell-cash strategy because many producers buy the calls but fail to sell the cash.

After we get past the May supply and demand report, sellers should be on high alert to not allow the December corn contract to trade above $6.05 without some upside price protection in place. The final technical breakout signal, which would imply all marginable positions are covered, would be a close above $6.50 basis. This will only be seen if there are significant yield problems. If you want me to guess the odds, it’s below 1 in 3.

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The soybean market was hit hard in February but was able to rebound on continued concerns about Argentina’s crop. These concerns helped to firm prices before South America’s harvest but will not propel prices to the winter highs. The best to hope for now is for the oversold condition to ease up. For the soybean market to get excited, it will need more interest from Chinese buyers.

As you can most likely guess, potential is building for market violence as we get closer to spring. If acres are up and solid yield prospects develop, the potential for November 2013 soybeans to trade above recent $13.50 highs looks bleak. As we proceed into summer, it is like corn—if the market would start taking out winter highs sometime in late May, producers who are net short futures need to become immediately concerned.

If the market were to close above $14.25, then it’s out of the boat and all ashore because the bulls have their weather scare.

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FEATURED IN: Farm Journal - March 2013

 

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