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.
- January 2012