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February 12, 2014
By: Bob Utterback, Farm Journal Columnist
 
 

BobUtterback Oct2011

As I prepare for winter meetings throughout the Midwest, it’s a good time to talk about the big trends that I believe everyone in agriculture will face. It’s important to decide how you’re going to handle these challenges before they occur.

I believe the cost of producing grains and oilseeds will slowly come down in 2014. As profit margins shrink, the impact on all businesses serving agriculture will be immediate and acute.

I expect a drop in land values during the last half of 2014. If anyone has land to sell, don’t delay—get it sold now. For those on the buying end, if it’s possible to hold off, plan to do so until early 2015.

The next domino to fall: Who is actually taking the risk and doing the work—producers or end users? Historic high profits in the past 10 years have encouraged many older farmers to extend their active involvement in farming. If profits start to erode, there will be a faster-than-expected exit of many farmers in the next 18 months. This sets up a bear market that can provide a golden opportunity for producers looking to expand—if they’re financially prepared. Do not be surprised if end users vertically integrate downward to control the type and quality of crop by providing financing.

Another big story that is building: Midwestern livestock producers are enjoying record prices. Unfortunately, when producers experience this type of hyper-bull market, they think it will last forever. The message is clear; the best cure for high prices is high prices. Livestock producers should prepare themselves for the eventual price decline, like the feed grains and oil­seed producers are experiencing.

The persistence of dry conditions in the western production regions will put increasing pressure on water regulations and the battle between agriculture and urban use. The inability to see a rebound in pasture conditions will also restrict how fast cattle herds will build in the western states. Both of these factors will only test potential weakness in land values in the western states compared with the Midwest.

In summary, agriculture might be on the edge of some significant structural changes. The opportunities far outweigh the negatives, if farmers are properly positioned.

Corn 12 3 45678910

At press time, the corn futures market is trading close to the bottom end of the trading range, as suggested by USDA cash projections. This implies that the pressure is moving from the bulls’ need to prove that prices can move higher to the bears’ ability to push prices lower. Once we get past the February cash-flow lows, we should expect a seasonal price recovery, but the intensity of the rally will be heavily weighted to spring weather patterns. Long term, I’m concerned that carryover could exceed 2 billion bushels, so this fall lead-month futures will have to spend some time below $4 in order to clear inventory.

Winter lows should be in by the time you read this. But the market is expected to be range bound until May when we have some solid numbers on spring planting conditions and acres. My greatest concern is that farmers will hold old crop corn into summer unpriced, which makes them very sensitive to a possible crash in basis from late summer to early fall.

Recommendation: Move cash inventory when it gets close to $4.40. If reownership is desired, buy July calls no later than the end of February. Focus on selling $4 or lower puts to help reduce the cost, but carefully monitor the flat price exposure if the market starts to make new lows after early May.

In regards to the 2014 crop, I assume those following my recommendations have already priced a significant amount of expected corn inventory. I strongly suggest rolling all hedges into the May 2015 contract from now through early May. Then, look for an opportunity to roll all long futures positions back to the September contract, during May on any modest spread inversion in the September or December corn contracts.

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FEATURED IN: Farm Journal - Mid-February 2014

 
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