Farmers who expect to receive crop insurance payments need to protect themselves against a mild sell-off in futures in September and October, cautions Farm Journal economist Bob Utterback.
"I think you are forced because of the mechanics of the market to buy a put," he says.
Utterback, who advises farmers on future trades and trades himself, forecasts a short-term "correction" in corn futures followed by a spike. A sharp rise in prices is just about the last thing farmers want to happen, he said, because it can destroy confidence among grain end-users and change business behavior.
"Drought is now the No. 1 issue on major news networks," Utterback said. "The psychology of the market, which is sometimes as important as reality, is getting very bullish. This is frightening stuff."
The current bull market is being fueled by uncertainty over the drought’s toll on yields. "This why we’re getting 60 to 80 point swings in the market," he said. "The market is very, very uncomfortable with its ability to forecast yield right now."
No one is quite sure how bad off the soybean crop is. The USDA has lowered its estimate of the soybean harvest to 3.05 bu., with yields of 40.5 bu. per acre. Some private analysts believe it will be lower. Many farmers are so worried about the status of their crops that they are afraid to go out in the field and find out, Utterback said.
"We’re getting to a point where the crop may not get much worse," Utterback said, noting that no one is sure how good yields will be in the counties that haven’t been stricken by drought. "By the Pro Farmer crop tour on Aug. 23, the market will have real good handle on how good the crop is. That will play out by mid-September."
In the meantime, the nation’s corn and livestock have become a political hot potato. Concern is building over whether higher prices will cut into grain and meat supplies and fan inflation. Utterback worries that the federal government may impose export restrictions or price controls, though nothing is likely to happen until after the November elections.
"There’s a lot of political heat building that corn prices are too high," Utterback said. "Overall, the economy is shaky; it can’t tolerate a food shock right now. So unfortunately, your corn is no longer your corn; it’s their corn, and they think the price is too high.
"This is my greatest anxiety, because when the government gets involved you can’t predict what they do, and they always mess things up. If this thing continues until March and we have a long-standing food event, the government will start getting protectionist."
- September 2012