Wheat is the leader!
Dec 02, 2010
The wheat market has now become the leader of the pack due to growing concerns about the upcoming crop. While I believe there are some concerns, we still have adequate global supplies and a repeat of the 2008 price event is very unlikely. Subsequently, expecting wheat to carry corn and beans back to the old highs is not practical in my opinion. Essentially, corn and beans have to do it on their own fundamentals.
Right now corn exports are dragging along, which has accounted for the recent price break. We will need solid confirmation of some further yield reduction and that China needs more corn to see the March contract go back to $6.17. As for beans, we could start to see some bullish yield reduction numbers coming out of South America if dry conditions persist. However, don’t forget—beans can handle dry conditions better than corn until we get to the later production stages. That’s why the market is not getting overly concerned yet, but as we move closer to January and February, it will be come critical. We believe the primary bullishness for beans is the constant demand for bean supplies by China, but a questionable increase in planted acres domestically. At present this fundamental is up in the air and will be critical as we move into the pre-plant time period in April.
Actions that we believe need to be done at this time:
- Decide on a target price you want to achieve before starting to price the 2011 corn and bean crops. Since we’re suggesting a $200 to $250 profit over costs per acre, it will be different for every producer. I believe the $5.25 to $5.75 level for corn and $12.50 to $13.25 level for beans meets this criteria.
- Decide on an operational plan on how to sell inventory once target prices are reached. Are you going to sell cash and accept losing all upside price potential if a summer weather event occurs? If price goals are not reached by a certain time period, what are you going to do? If prices break, what is your strategy—store or dump at harvest? If you dump inventory, will you reown? Instead of selling cash, are you going to buy puts or sell futures and use some type of call strategy to give you market flexibility? We obviously believe one should have some upside protection strategy, but it requires cash flow to do this. It is now time to get your financing arranged and your hedge account set up for the 2011 contracts.
- Run the market plan through your head several times and model out how you are going to react if a yield reduction event occurs versus perfect weather and a great crop. At what price level will you consider 2012 and 2013 protection? Remember back in 2008 when corn went from $4 to $5, we all thought it was the high and sold. As we soon found out in May and June when corn went to $8, nearly everyone was paralyzed. In the end tremendous multiple year sales were missed due to inability to act because of cash flow risk exposure. Remember, as ag producers, you have [historical] price cycles where high prices ration usage and stimulate production, which eventually leads to prices moving below cost of production!
- If at all possible continue to focus on locking up inputs for as far into the future as you can push supplies and landlords. We see only one direction for fertilizer, interest rates and land rents to go . . . UP! The more that can be protected, the better marketer you can be; this mean multiple year cash rents and building and holding multiple year supply levels of inputs on farm if possible. We know it sound wild, but try to build an inventory of critical items needed on the farm. For example, it is rumored that a farmer needed some new truck tires but the local dealer had them on back order for at least two weeks. Ask yourself, do you want to wait two weeks for a tire or other critical supplies during planting and harvest season? Bottomline: Manufacture and retail suppliers are not going to pay to maintain inventory until this economy improves and then it will continue to be tight.
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