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Outlook: Hold Tight to Profits

January 25, 2014
By: Bob Utterback, Farm Journal Columnist
 
 

BobUtterback Oct2011

We started 2014 with extremely frigid temperatures in the Midwest. While it could be killing bugs and even having a positive impact on soil composition and moisture conditions, I have to say Mother Nature is pushing the norms. Will supply outpace demand? Producers with large amounts of unpriced corn inventory on the farm might have painted themselves into a corner. Granted, they can hold off selling for a little while, but come early summer, the end users will know they can wait if acres get planted and trend-line yields are expected.

I know many are saying, "You bears are always negative." I have to admit I was bearish during the spring of 2011 and 2012, and some producers got burned being bearish unless they exercised good risk-management practices. This year will be no different.

In my opinion, producers should take advantage of early reasonable prices, but if serious concern about acres or yield develops between May and June, you must adjust risk from a net short futures or cash position to a long put position. Having a plan that integrates crop insurance with futures and option strategies plus cash sales is a must this year in order to get through the year with limited negative financial impact on the bottom line.

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The price bias from January to July clearly favors the uptrend, and producers know it! Depending on how we figure the numbers, lead-month corn values in July are normally 108% of the yearly average price. This tendency for higher prices and the perceived high costs invested in the 2013 crop have producers holding a high percentage of the crop still unpriced. While I don’t have exact numbers as I write this, I would not be surprised if more than 60% of the 2013 crop is unpriced.

While producers are inclined to try to starve the market, I have to say the opportunity for the corn market is limited. While lead-month prices below $4 is difficult to argue, it’s very difficult to argue summer values much higher than $4.75 at this time.

It’s also hard to get producers to price next year’s product when there is a large amount of unpriced inventory on farm. This is the situation developing for 2014.

We cannot count on unexpected demand growth in exports, feed usage or ethanol. We will be hard pressed to meet USDA’s initial estimates, as it is. As the market focuses on spring planting, projected planted acres and yield potential, I fear producers might wait until July for price confirmation, and the highs will have passed them by.

If we figure the average lead-month high for corn since 1970, the low can be projected around 25% lower. For example, assume an early 2014 lead-month high of $4.75. If prices stay around the average, you could project a lead-month corn contract average low to be $3.57—before basis adjustment. If acreage and yield indicate potential production at more than 13.9 billion, carryover will increase in 2014, and sharply lower values will be needed to clear inventory.

Strategy: Dump old crop inventory and, if upside risk protection is desired, maintain ownership in a very conservative, limited-cost call strategy.

For new crop, be at least 50% priced for 2014 once December corn gets above $4.50. Once your crop is in the ground, move toward 100% of an aver­age crop. I prefer being long deep-in-the-money puts until we get past late June, then roll into cash or futures sales. If you have to sell excess corn off the combine, immediately lock up fall basis. It could be really mean if corn yields exceed 162 bu. per acre!

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FEATURED IN: Farm Journal - February 2014

 
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