The oilseed, grain and livestock markets all came out of the fall doldrums and really extended their gains in February and March. The strong performance of the stock market in 2013 helped to raise expectations that global economies are recovering and demand has stabilized.
I know you get tired of me saying it, but as a farmers, you’re in business to produce a crop and then try to get a fair return on your investment. This places you in the difficult situation of hoping for a bullish trend when unpriced and a bearish trend when inventory is priced.
All I can suggest is this: When you start to sell at a profit and the market continues to move higher, it might be an opportunity to sell future production for even greater returns.
Weather will be a major player in the grain markets this year. It will work on our emotions: "Hope" that you have a good crop and a national yield-reduction event occurs. "Fear" that if you sell, the price will go higher. "Greed" that this time it will be different and a home run is possible. Don’t be the last rat out of the corn crib because there is a big rat-catching dog waiting right outside the door!
As you read this, you’re more than likely on the run, getting ready to start planting (unless you’re in the South). The market bounce in late February to early March was as much related to the expectation of cold weather as the disruption of grain from the Black Sea region. The old rule of thumb—buy the rumor, sell the fact—is a good guide. Have a floor under a large percentage of your expected 2014 inventory about a week before planters pick up the pace in the Midwest. The later we get into April to early May, the more bullish the market will be. If the crop is pretty much planted by the middle of May, then the pressure reverts back onto the bull to prove that hot, dry conditions are going to reduce spring-delayed crops.
Any remaining old crop corn should be priced at $4.90 basis the July contract. Do not remain open the basis; get it sold. If you believe prices are going higher, place yourself into a limited risk, vertical call strategy (July or September contract), but keep the premium cost down. If dry weather sparks a bullish breakout after the June supply and demand report, adjust the long position accordingly to open up the top side potential.
I hope producers have already priced a considerable portion of expected inventory and are moving back to a limited-risk strategy. You should have 75% coverage no later than the May supply and demand report. A long vertical put strategy is preferred to cash or futures. Roll all puts into futures or cash positions in late June to early July, when we are confident of planted acres and yields.
The biggest opportunity lies with the 2015 crop. USDA suggests a yearly average cash value of $3.30 in its recent baseline projections. If we see trend-line yields the next two years, supply will grow faster than demand. If we do see a late May to early June price event that drives
December 2015 to between $4.90 and $5.10, a 50% short futures position should be implemented with no call defense strategy. I would not start working on a defense strategy for the 2015 position until October. Again, locking up a solid price and then defending against a weather event seems more responsible than producing it and hoping the market will be bailed out. One of these days, this strategy will get buried!
The soybean sector is really a tale of two markets. The old crop is exceptionally strong because of continued Chinese buying. I don’t anticipate the old crop will get much below $13 until we are well into summer, but just as important, current high premiums are difficult to justify. Be satisfied with current prices, and get the bins cleaned up. Use any further market strength to sell expected 2014 inventory.
The battle of USDA numbers is on—soybean export estimates versus the potential for greater- than-expected planted acres. Exports will likely cool off and we will back off from the current 78 million metric tons—a huge overestimation—by summer. The anticipated 79.5 million planted acreage figure released at the USDA Agricultural Outlook Forum is going to go up. The only issue is how much. If we see a cold spring, soybean acres could jump above 81 million, which will place a lot pressure on November 2014 soybeans.
I’m very concerned about pricing expected 2014 production at $11.80 or better. It is imperative to have the ability to improve selling price if the market moves higher. Therefore, be long the November puts and reduce cost by selling out-of-the-money old crop puts. I would not want to be in short cash or futures until late June.
- Early Spring 2014