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Outlook: Beware of Major Price Swings Ahead

August 27, 2011
By: Bob Utterback, Farm Journal Columnist

Bob UtterbackThe government’s inability to effectively manage our debt-to-revenue situation makes it difficult to know what will happen on a day-to-day basis. I’m much more comfortable projecting what to expect for the next two to five years.

People are scared and don’t know where to go with their money. I see more interest in buying land. Until interest rates take off like they did during Jimmy Carter’s administration, land prices will go up, which means cash rents will increase as well.

In the near future, food prices will become a major political issue. In 2012, we’ll likely see a major attitude shift toward government policy. There is no love in Washington for ethanol subsidies; they will expire. While I do expect crop insurance programs to be spared, most other programs will be trimmed back. Most grain operations will be on their own when it comes to protecting profit margins.

Producers are going to have to be even more sensitive to controlling input costs. Fertilizer costs, cash rents, and seed and machinery costs, as I mentioned earlier, are going to go up. When supply is stimulated on a global basis and demand is rationed, a dangerous situation is set up for 2013 and beyond.

Livestock producers are entering an interesting time period as well. I’m hearing rumors that cattle and hog producers are making money paying more than $8 for cash corn. Not many producers are going to throw in the towel this fall, even if the higher corn values continue into 2012.

This implies that near-term (October and November) cattle and hog prices could be under price pressure. The good news long-term: As breeding herds are contracted, we should see attractive prices for late 2012 and early 2013. The only long-term drag on livestock prices is consumer resistance to pay higher prices.

Sales Index Key

Excellent selling opportunity: 10

Excellent buying opportunity: 1

More than ever, producers must decide what they want from the market and have a plan for accomplishing those objectives. Make sure there is enough financing to handle the price swings. Finally, work with an adviser who puts your interests above the level of activity he can generate from your operation.



Sales index: 3

Those with short positions must have a plan to defend against cash flow exposure. Buy long puts rather than short futures. If the market trades above $7.22 basis the December 2012 corn, we could easily move into a panic phase for corn that would move us into a demand destruction event. This is the absolute worst thing that could happen long-term to corn producers as our lawmakers start working on a farm program next year.

Anyone who has unsold 2011 inventory should sit on it until December 2011 to February 2012. Those who are short December corn in cash or futures transactions and are looking to store until next summer should consider rolling hedges forward to capture the limited carry that exists. The risk is high for December corn to go premium to the deferred contracts as we move into early winter.

Anticipated 2012 and 2013 production will be difficult to price because the highs will come before the seed is planted. After experiencing two dry weather events, it will be hard for producers to forward sell their 2012 and 2013 crops. Buy deep-out-of-the-money December 2012 calls soon to help ease the pain of selling early. Develop a plan now on how to approach selling multiple-year crops if a price event occurs this winter.


Sales index: 5

Soybeans have been trading between $14.10 and $12.85 for some time. A close above or below this range could trigger aggressive stop loss orders to be filled and new market positions.

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FEATURED IN: Farm Journal - September 2011

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COMMENTS (2 Comments)

honkers - Malta, MT
How many of the cattle placement numbers are cows,[not feeder catte] entering feed lots in the southern plains due to drought?
10:37 AM Aug 28th
honkers - Malta, MT
How many of the cattle placement numbers are cows,[not feeder catte] entering feed lots in the southern plains due to drought?
10:37 AM Aug 28th



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