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Do You Have an Exit Plan?

November 10, 2012
By: Bob Utterback, Farm Journal Columnist
 
 

Harvest is behind us and it’s time to take what we’ve learned from a challenging year and apply it to our 2013 game plan. No matter how confident you are of your position, you must have an exit plan if unexpected events occur. Case in point: 2012.

At this time, there are fundamental unknowns and we can only guess the outcome: Have the highest corn and soybean prices in history rationed near-term demand? Will corn acres expand or will attractive wheat and soybean prices pull acres away? How will the South American crop yield? Will the global economy start to rebound or will the U.S. fiscal dilemma spur another global recession?

All that can be done now is to assess the risk and decide your level of aggressiveness. I believe 2013 is not the year to be a big risk taker!

I don’t have a crystal ball, but I have common sense on my side after many years of working with farmers. Here’s my take on what lies ahead:

Producers should not go broke if an average yield corn crop can be produced for $5 and sold for $6.50 to $7 or if soybeans are produced for $10 and sold at $14.

Producers should use crop insurance, especially since the government pays a big part of the premium.

Producers could go broke if they have no plan for the pesky unknown events that seem to  magically occur when finances are weakest.

A lot of profit potential is thrown away if basis and spreads are not understood well enough to help manage a cash position.

Remember, a bull needs to be fed every day, but a bear can be starved and still kill.

My market plan for 2013 includes selling as early as possible to lock up a "fair" return on investment. Sell in such a way that it does not negatively impact cash flow, yet allows you to improve your bottom line if an
unforeseen event should occur.

How? First, realize it is difficult to outguess the market. Second,
understand the terms of the marketplace. Third, protect your crop value; good marketing will be costly. Once knowledge is on your side, strive to keep your hedge account, which protects profit, separate from your speculation account.

Questions remain. All of this leads to more questions for the coming year.

Corn-on-corn acres have less yield potential than corn after soybeans. This is the year to shift, but be aware of the impact on inter- and intra-commodity spreads.

If double-crop soybean and wheat acres are increasing, shouldn’t wheat producers be actively hedging? If producers plan to shift, they need to get a floor on an average yield and buy crop insurance.

Since domestic stocks are tight for corn and soybeans, when do you decide to sell? Plan for early sales to lock up a solid return on investment. Some farmers like to achieve 30% to 35% as long as family living expenses are not too high and land costs are based on average farm prices.

Keep an eye on seasonal timing. The first time period to sell is prior to the March Prospective Plantings report. The second is prior to corn pollination and the last, after harvest. Determining the percentage of the crop to sell at each time relates to profit potential and the underlying price characteristics of the market.

Since we have had historically high prices, assume demand has been rationed and the market will remain strong until it is assured that next year’s crop is planted. Once the trade is comfortable with the expectation of an average yield, expect prices to trend lower. I suggest pricing at least 50% shortly after the March report and 100% by mid-June.

I realize it is difficult for producers to sell 100% of an expected crop after two yield reduction event years! Buy in-the-money puts to be sensitive to the underlying cash market. Otherwise it’s best to sell cash, which will be close to impossible if there is any hint of weather problems. If farmers insist on selling cash, the only option I see is to buy December out-of-the-money calls at the strike price that they want upside price protection to be valid against cash sales—$7 for December corn, $14.50 for November soybeans and $9 for July wheat.

Unsold $8 corn and $16 soybeans are still in the bin, which has many farmers focusing on old crop strategies. Take advantage of this time to bulletproof your 2013 marketing plan and plan for unknown events. Remember, the early bird gets the worm and pigs get slaughtered.

The information provided is believed to be reliable. There is a risk of loss associated with trading futures and options. Anyone acting on this information is doing so at his or her own risk. Consult your Risk Disclosure Statement before trading. To comment on Outlook, e-mail Outlook@farmjournal.com. For information on risks and strategies or to subscribe to Bob
Utterback’s Internet site or e-mail service ($400 per year), call (765) 339-7704 or e-mail bob@utterbackmarketing.com. You can read daily comments from Utterback after markets close at www.farmjournal.com.

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FEATURED IN: Farm Journal - Mid-November 2012

 
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