Harvest is nearly complete for the majority of farmers in the Midwest. Corn is coming in so dry that in many cases bin driers are not needed. Bean yields overall have surprised quite a few producers, in light of the dry conditions in August.
Fall field work is in full steam. This year, producers will get all the fall work they want done. There should be no delay in spring planting next year unless wet weather becomes a factor. The biggest limiting factor I’ve heard about this fall is farmers getting fertilizer applied. We are hearing of many areas of the country where supplies are already running short. This is a lingering result of the fall of 2008, when fertilizer suppliers got caught with big inventories and suddenly the demand wasn’t there. Suppliers don’t want to take the risk of stockpiling inventory again.
What we know. Everybody now knows about the short corn and bean supply situation. In addition, everyone knows about China’s strong demand for corn and beans. Most U.S. grain producers will be sitting on all their remaining unpriced inventory, waiting until next year, at least, to open up the bin doors. If I had to guess, I’d say farmers will store more corn bushels than soybean bushels, which makes soybeans even more sensitive to upside risk if any production problems occur with the South American crop.
While we have two USDA Supply and Demand Estimates reports still to come this year, the next round of bullish reports is expected to come out in January. This is when we will receive final production figures for the U.S. crop and some adjustment in foreign producers such as China. It is my expectation that most of this bullishness will be factored into the market in December, before the January reports.
How high will corn have to move in order to ration usage and stimulate acres in this situation? You will be reading a lot about this topic during the next few months. I’ve been hearing talk of some very wild numbers—but remember, the market often anticipates! Just when everyone is the most bullish and not thinking about the selling side, it becomes real interesting to me as an adviser to producers, whose function is to sell.
Smoke screen. Much of the bullishness of this year’s reduction of the U.S. crop will be factored in earlier rather than later. For the market to move higher, we have to confirm production problems with the South American crop, see absolutely no reduction in demand or have a problem getting enough corn and bean acres planted next spring.
Granted, if any further global supply reduction event occurs, as we have recently seen in Russia and the U.S., it will be enough to ignite the market in the first quarter of 2011. This would force domestic and foreign governments to respond to rising concern regarding food prices. The problem is, every time the government gets involved in setting prices, it usually leads to bad things over time.
If all of this sounds bullish, remember that it is near-term but also based on continued supply reduction and strong demand. If I have learned anything in the ag market, it is that surprises always happen when they have the potential to hurt the most players.
Corn strategy. At this time, farmers must separate the bullishness of old crop from the 2011 crop year in their minds. If you have remaining old-crop corn in the bin unpriced, I suggest that you focus on selling your inventory if the December contract can get into the mid-$6 range between now and the end of the year. Take what you were going to spend on storage and risk to re-own a limited-cost July call strategy.
Bean strategy. I’m on record as wanting to sell $12 beans off the combine and not wanting to store. Again, I would take what would have been spent on storage and instead risk the premium to re-own beans for July 2011 just in case something happens. Remember, $12 beans in January need to be close to $13 beans in July just to break even. I want my cash sold and limited risk on paper.
Next year’s crops. My suggestion is that if December 2011 corn can get close to the $5.50 level and November 2011 soybeans get close to $12 between now and April, farmers need to get floors under the market but also allow themselves some opportunity to improve the bottom line if prices make a rally.
How you sell and which month you sell will be more important than ever. Next month, a special report outlining this strategy will be available. For prices and information about the report, call (800) 832-1488.
Feed costs in check. We are in a corn and soybean market bull event. The market is asking itself how fast demand will be rationed. This situation depends on how inelastic or how firm demand remains in light of rising prices. I’ve worked under the assumption that livestock has been the most inelastic of all sectors using corn. But this assumption seems to be developing some deep cracks this year.
Feed buyers are now caught in a tight spot. If you do not have any protection in place, you have to get corn and meal usage locked up. If you don’t, the losses could be so huge that they will drive you out of production. I suggest you have cash needs locked up through August of next year.
Big price surge. While export and ethanol demand are remaining stable and even growing, we are already seeing an immediate response to higher feed costs in the hog sector.
Pig slaughter has increased much faster than one would expect based on USDA’s reports. I believe it’s a clear sign that producers are immediately reacting to the prospect of high corn and bean prices for most of next year and are electing to reduce herd stock now instead of fighting to stay in business.
This means for the near term hog prices could be weaker than anticipated, but the foundation is being developed for a major price surge as we move into 2011. The implication is clear for hog producers: Your focus should be on getting all input costs protected until the 2011 new-crop supplies develop and accepting most of the risk in pricing of product, especially after the first quarter of 2011.
Cattle need to recapture exports.The cattle market has been in an overall uptrend since June, due to the nation’s herd numbers being at low levels while consumer demand seems to be improving.
The real key to higher prices will be solid improvement in export demand. While cattle prices are
testing two highs, I’m in no hurry to lock up cattle supplies. The high grain prices will make placement of feeder cattle difficult at best and will keep supplies overall tight.
The only real concern I have about the downside risk in the cattle sector is if we have a serious double-dip economic recession and consumer demand dries up due to lack of income. In this situation, if beef producers don’t contract inventory supplies fast enough, cattle prices could be hurt temporarily.
For all livestock producers, the biggest risk right now is high feed costs. If producers get feed supplies covered and resume holding inventories with a limited downside price risk, such as deep-out-of-the-money puts at break-even, they will be in better shape moving forward. Now is not the time to be short futures.
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