Positive margins are still possible from just-harvested crops, but it takes skill
Farmers should not waste their time searching for a quick fix to the brave new world of corn and soybean markets, but there is still money to be pocketed by those quick on their feet. While experts differ widely on price forecasts and marketing strategies, the 15 analysts on the following pages agree that margins will be far tighter in 2014 than in recent years. Keep the following tips from advisers as reference points as you work to understand and implement new sales strategies for the upcoming year.
As we adjust to increasing stocks and weaker prices, markets are in transition. Lower prices will discourage global production and encourage use. The one event that could alter this would be poor growing conditions in South America. The new year holds the potential for two market surprises:
1) Chinese imports and production and 2) changes to the ethanol mandate, which would be bearish for corn.
One alternative to consider is an option-based risk-management strategy. There’s a lot of downside potential in the market; however, supply and demand surprises could change that quickly. Farmers can use an option-based program to establish a price floor for inventory in storage or expected production but leave the upside open. Another strategy is to make cash sales if basis is favorable and purchase call options.
The last time U.S. farmers looked at a 2 billion bushel carry-out was 2004/05. It’s possible that the 2013/14 carry-out will get close to that. Unlike nine years ago when the stocks-to-use ratio was 20%, today’s ratio is 14.5%. This means we won’t see $2 corn again. Still, prices will remain under pressure.
For just-harvested corn, farmers should focus on selling for the carry and padding their income by selling call options.
Soybeans also face lower price pressure, but demand from China might continue to provide price support, at least in the near term. The inverted soybean market says farmers should sell now.
Without an unforeseen demand catalyst, we’ll have to rely on a weather-induced supply shock somewhere to get back to $6 corn and $15 soybeans.
Corn markets continue to respond to large ending stocks. U.S. soybean stocks are not as burdensome, but world supplies are at record levels.
With the expectation of a less friendly U.S. monetary policy, funds have left or are reducing commodity holdings. In this type of environment, funds choose to exit highly inflated commodities, which provides global buyers an incentive to bid low as they know corn farmers must eventually sell for cash flow. Barring a major weather event, prices should bottom out at sub-$4 per bushel corn and sub-$11 soybeans. There are many tools, such as an option box, option three-way or covered hedge/sale, that are relatively safe. They allow you to establish a floor while keeping the upside open.
Global ending stocks for corn are the highest in 10 years, and this keeps prices on the defensive, allowing futures to test $4 per bushel. When we’re in a doom and gloom scenario, typically fundamental news emerges and turns the market around.
Corn futures charts show a gap around $6 per bushel that might get attention in the coming months, but there’s no news to justify such a price move yet. We’ll continue to wait for unexpected events, such as weather, China or friendly USDA reports, to spur prices higher. However, at this time, farmers should view any rally as a selling opportunity.
Domestic soybean demand will keep prices firm for the near term with the market signaling to sell. If news develops to warrant prices of $13 per bushel or more, move to re-own. Deferred contracts will likely stay on the defensive, given the prospects for a record South American crop. Spring and summer futures contracts seem likely to test $12 support levels; thus, prices are likely to trade sideways to lower unless a South American weather scare occurs.
Prepare for both bullish and bearish scenarios. Make incremental sales as prices go to the high end of ranges. If prices break through technical resistance, plan to re-own the crop. Finally, establish price levels for making cash sales.
Commodity prices are cyclical, and the current downside price cycle is not yet complete. It will likely run through January. Once a bottom is discovered, both corn and soybeans will enter a base-building phase that could take anywhere from a few months to three years to achieve.
For corn, we have been heavily priced in short futures for months and will be looking to take profits soon. To price remaining corn, we will look for basis improvements between now and March. Soybeans will feel negative price pressure from sharp production increases in South America.
What are potential surprises? Low corn prices will likely bring a sharp increase in exports. Ethanol production could also jump more than anticipated, due to exports. This will help in the base-building phase for both corn and soybeans.
Huge ending stocks for corn will cap rallies, but most producers are well financed and can wait for those rallies.
- Mid-November 2013