The holiday parties are over and many of us have already broken most of our New Year’s resolutions. It’s time to get down to the basics of developing marketing plans for 2012 and 2013. I have to tell you that now, more than ever, there is serious risk potential in front of us.
I assume most producers are in rather good financial shape right now. The strong prices we’ve had from 2007 through today have helped to stabilize the bottom line. The problem is that just about every item used to produce grain has increased the cost of production. I sense that many are also increasing living costs. Producers are fixed on $7 to $8 corn and $13 to $15 soybeans, and they have no plan in place for the downside. A two-season price action close to or below the cost of production on fall lows would put a serious financial dent in everyone’s ability to weather the bearish storm.
I have written it in the past and you will read it again today: I’m proud to be a bear! While there are times that bears have to hibernate, it is getting very close to a time when bears can feast on those fattened-up bulls.
10 = Excellent sales opportunity
1 = Excellent buying opportunity
The sharp price rallies in 2010 and 2011 have set up a very dangerous pattern. Historically, when we have had sharp price rallies due to supply reduction, major bear markets develop. The big difference now has been the building demand of ethanol since 2001. I contend that ethanol growth has peaked and the best we can hope for is sideways growth and, at worse, a steady retreat from now on.
The bulls will claim that whatever we lose in ethanol demand will be replaced by increased corn exports to China. While I agree that the Chinese demand should be very strong for many years to come, there are two concerns that need to be addressed: (1) Can China improve its crop yields, as we saw by the sharp climb last year? (2) China is making strides to bump wheat production in the Black Sea region to diversify its feed needs?
The rate of demand growth since 2000 will be the exception rather than the rule. While demand will remain strong, it could have a negative impact by building global economic uncertainty. If the macroeconomics turn negative in late 2012 and 2013, we could see a real flattening out of end user demand.
At the same time, the production side of the equation should be on a steady growth curve. I see growth in acres produced and a return to trend-line yields. In fact, what happens if we actually see good spring and summer weather, with the planting of better hybrids? Is anyone ready for production above the trend-line yield?
Producers have to be realistic in determining profit targets for 2012 and 2013. I suggest that a base Decem-ber 2012 fut ures price between $6 and $6.50 should be used to sell 100% of an average yield production by no later than early April 2012.
Should you defend cash or futures risk exposure from a May to July weather scare event? Once we get past the May supply and demand report, buy the September call to defend upside risk exposure if the market starts to rally. Rather than sell cash or futures on spring highs, focus on buying in-the-money puts and rolling up. Whichever way a producer goes really depends on cash flow and the ability to manage the position.
This market was rather weak all fall but started to find a spark as 2011 closed due to concerns about South American weather. While the weather concerns will continue all the way into February and March, it may not be enough to ignite the bean market.
The possibility of increased soybean plantings, along with solid global competition, leaves beans poised for an increase in carryover that could quickly overtake the market this spring. I predict soybean plantings will grow to between 76 million and 77 million acres. If the market is close to trend-line yields, we could see increases in stocks to burdensome levels. I am concerned that soybeans could experience a spring to fall price drop that would take prices below the cost of production by harvest.
Early selling and defending against a weather scare is the battle cry. Sell November 2012 soybeans between $11.50 and $12.50. To be able to gain from a seasonal rally in the spring, first buy November puts by early March but restrict selling deep-out-of-the-money calls until July. Some may recommend this in March or April, but I fear that if a weather event occurs, it would have a negative impact on the increase in premium due to the flat price rally and increased volatility. I would prefer producers pay a little premium early and wait to sell calls until June or July.
Interest in buying wheat instead of corn as a feed supply last fall helped to lift wheat out of the doldrums. The problem is the global market still has too much inventory. Unfortunately, there is a very weak long-term price outlook for corn that results in wheat prices having to rally on their own. But the cupboard is getting bare and the options are limited for strength.
Producers should use any seasonal winter concern about crop conditions going into March to price 2012 production. Use any price bounce back to $7-plus to start scale-up sales. Selling off the combine could encounter some serious price risk. I understand many producers don’t like to store wheat, but it may be necessary for 2012 production if producers want to get the most for their product.
Even with cattle markets at record prices, the growth in the export market is keeping prices brisk. How long until herds start to expand? If rains fall in the Southwest, will they rebuild liquidated herds? This will impact how long cattle prices stay steady. I expect prices to remain above $120 cwt. for most of 2012. Use puts only to protect the downside if the market starts to make new lows after April. For now, wait, but be ready to lock up inventory from late 2012 to early 2013 if prices falter midyear. For feed, look only at a modest two- to three-month buying strategy. The real opportunity could come between September and October if we see the corn supply event that I expect for 2012.
The hog market is not as strong as the cattle market and, as we all know, can grow much more quickly. Watch the hog market carefully from May to July to be an aggressive seller of
expected late 2012 to early 2013 inventory. The reason is simple: If the economy has the bearish reaction I suspect, consumer income will tighten and supplies could quickly back up just as more inventory comes on board.
Hog producers need to be more aggressive than cattlemen on long-term hedging. More than likely, hog producers can get through the first half of 2012 unprotected. Late 2012 and 2013 concern me. Start thinking now: What is the lowest price that can be accepted? Prepare a plan to begin pricing during the seasonally strong May and June.