Outlook: Complex Markets Offer Potential for Strong Profits

March 11, 2011 11:36 PM
 

Bob UtterbackAs we move into springtime, the fundamental factors that will dominate the markets are twofold: demand and planting intentions.

The first factor specifically involves demand for corn and soybeans. Right now, we’re still seeing exceptional ethanol consumption, feed usage and exports. Simply put, $7 corn is not slowing down usage.

As always, the reasons behind the strong demand are not so straightforward. Ethanol is not being rationed because a lot of $4 and $5 corn was bought—and is now being used to make $2.50 ethanol. Ethanol plants are making plenty of money. The cheap corn will likely run out by June. I believe that when faced with high prices, ethanol production will drop like a rock.

Holding their own. As for livestock production, cattle and hog prices have rallied along with the corn and soybean markets, resulting in strong livestock returns. Since herd sizes are small and demand has stabilized, there’s little incentive to liquidate herd capacity, which is historically
associated with higher corn and soybean values. We might see some herd liquidation this fall, if we confirm tighter corn and soybean supplies.

Export influence. The wild card on the demand side of the equation is exports. Food inflation in China is forcing the Chinese to buy corn and soybeans from all over the world. They are starting to give mixed signals, though. On the bullish side, they are considering lowering their import tax to help bring in bigger supplies. This makes sense. At the same time, though, they are telling their banks not to finance any sort of inventory storage. They don’t want to promote hoarding; instead, they want immediate consumption. I suspect they want to prevent corn and soybeans from
doing what the cotton market just experienced.

For now, higher prices are not reducing consumption as fast as anticipated. This places a lot of pressure on the supply side of the equation. What will happen in regard to acres and yield?

Acreage count. All eyes are on the March 31 Acreage report and USDA’s estimate of producers’ planting intentions. It’s obvious the interest level is very high for corn. The potential for profit is big, and producers know it. The issue for many producers, however, is that they don’t like to mess with their crop rotation mix. They’ve designed their operations for a certain amount of corn and soybean acres, and to change their plan causes a lot of problems.

Currently, the trade is fixed on needing 92 million corn acres and 78 million soybean acres. I think corn figures will come in higher, but not by much. When it comes to soybeans, if we see less than a 1.5 million acre increase, it could be an interesting year ahead, especially if we have a yield surprise.

Weather reality. This year, more than ever, it all depends on the weather. All of this talk about potential corn and soybean acreage figures really depends on El Niño versus La Niña and whether we will see a change in the pattern. The low sun-spot activity that reduces solar radiation and
accounts for cooler oceans around the equator is projected to increase the odds of a cooler spring. Timely rains this summer could be hard to come by, as they were this past year. This is not the type of weather pattern you want to hear about when you need high yields.

Flexibility is key. How should strong demand, questionable acreage expansion and uncertainty about the weather affect your marketing plan? While strong profits require action, you need to be flexible to benefit from upside price moves if they occur.
 

Corn

Sales index: 6

While the profit potential suggests that there are excellent sales opportunities ahead for corn, the uncertainty of the market merits cautious selling until the summer months. I suggest aggressive sales of December 2011 corn between $6.20 and $7 for 100% of your expected inventory. The positions should be sold in the cash with a long call in the July to defend against upside price events.

If you’re in a production area that can deliver against the September contract, I suggest you take a hard look at changing seed varieties. Plant shorter maturing varieties to allow for an earlier harvest in order to take advantage of the September premium compared with December.

As for multiple-year selling, make the market pay you a big premium to sell early. In regard to expected 2012 inventory sales, do nothing until at least mid-June. When talking price, I want to see the December 2012 at $6 or better to motivate me to sell. Once sales are made, be prepared to defend the position if we experience a respectable sell-off into the fall.

Beans

Sales index: 6

Soybean carryover is approximately 140 million bushels. If we do see a 1 million–plus acreage increase this spring and a 43.2 bu. average national yield or better, the carryover level should grow and prices will peak. Likewise, it will take as little as a 1 bu. drop in the national average yield to see those carryover levels decrease to major price rationing levels. This is the big uncertainty for soybeans.

With a large South American crop coming on, prices should not rally that much more. The problem is, if any yield reduction event occurs from July through September, the price for new crop soybeans could drastically increase. This is why you need to sell $14 soybeans off the combine and then look at spending 50¢ to 75¢ to buy upside call protection.

Anytime the market starts taking out the winter highs after early April, you should defend all sales for new crop on the books. I urge you to have a marketing game plan already ironed out because if we do see this technical signal, it will be quick and violent and you will not have much time to make up your mind.

Special note to livestock producers: If we see the soybean market take off in the spring or midsummer trading window, be ready to protect your soybean meal needs for the year.

Simply put, the market could trade counterseasonally higher through the fall until we get into the South American production period.

Wheat

Sales index: 8

The wheat market has benefited from the global uncertainty about supplies and building demand. Granted, we have had some production problems around the world, but the supply situation is nowhere as tight as it is with corn and soybeans. With that in mind, where do we go from here?

The corn market will be trying to encourage Western wheat growers to plow up poor-quality wheat stands and plant corn. In the short term, this will be helpful for wheat, but by itself it will not lift the market. The real potential for wheat to move higher lies in what kind of weather patterns we see for corn and soybean farmers this year. If a weather event occurs, wheat prices will go up. However, if it does not, caution is warranted.

Looking to 2012, we all know that wheat can be produced on a global basis faster than corn or soybeans. That ability to quickly rebound supply is my primary concern for wheat prices next year and beyond. Current high prices will greatly motivate expansion first in the wheat complex.

This summer, if the fireworks start to shoot off in the corn and soybean markets, focus on 2012 wheat production. I know this advice is a little vague, but right now that’s all I have to offer.

Start preparing, but don’t take any action just yet.

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