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Outlook: It All Depends on Corn

April 30, 2011
By: Bob Utterback, Farm Journal Columnist
 
 

Sales index key


Excellent sales opportunity.....10
Excellent buying opportunity.....1

Corn and soybean producers are enjoying elevated prices, but when does too much profit become a bad thing? As of now, corn is going to have to climb to $8 and higher to ration usage, but what will be the long-term impact? How fast will government policy on ethanol and other farm programs change to reduce usage or increase production? Current profits for corn and soybean producers are at the highest levels we’ve ever experienced prior to the crop being planted. Will this result in a significant increase in corn acres, or, if we have a weather event, will we be on the verge of a major global food crisis?

I know everyone would like a simple black-and-white answer, but there are several aspects of the supply-and-demand situation that we have not experienced for some time—the big one being that not only do we have the annual weather influence on supply, but we’re also seeing exceptional domestic and foreign demand for corn and soybeans. The long-term demand prospects are solid and will not go away … they will steadily build. So the answer to the pricing riddle is another question: Will we react fast enough to increase acres and yield to cause an abundant supply?

Corn

Sales index: 9

The market will start to experience serious rationing as the lead-month futures contract approaches $8. Farmers with unpriced bushels should clean the bins as July inches closer to this level, but they may want to stay open the basis. Rumors are that end users are concerned that cash basis bids could be a premium compared with the futures as July and August near.
 

New-crop corn.

Amazing profits are on the table; the issue is, how much higher do you want to push it? USDA was essentially correct in suggesting more corn acres [92.2 million] will be planted. In fact, if Mother Nature cooperates and we get a 15-day window of decent planting conditions in the Midwest, I would not be surprised to see this number grow. While this would slow down the advance in new-crop corn, it would not mean the bull market is over. We will have to get through pollination risk in July and even possible concern with early frost if a lot of acres are planted in May.

I suggest putting a floor under 75% of expected production as the Decem-ber 2011 corn contract moves near $6.50 to $6.70. I prefer a long put strategy if filled now and would sell cash or be short futures until late June to early July.

Beans

Sales index: 7

Your position on soybeans depends on whether or not you think all of the corn acres will be planted. If USDA is correct that soybean acres will be down because it is more profitable to plant corn and cotton this year, things could get exciting this summer. This is where problems develop for me in regard to a selling strategy for soybeans. If soybeans can be produced for $8.75 a bushel and you can yield close to 50 bu. an acre, soybeans at $14 are more than $250 per acre higher than all expected costs. While it’s not as good a return as corn, it’s great compared with historic profitability levels for soybeans. So should you take the sure thing or go for the home run? I don’t favor the long ball play—lock up $14 soybeans and spend between 50¢ and 75¢ to give yourself about $4 of upside potential.

I prefer that producers diversify their market plan and selling strategy. It looks as if soybean acres won’t expand and if we go from cold and wet to hot and dry, it could impact soybean yields. In fact, if we plant the March expectation numbers and see a drop in yield from 43.4 bu. to 42 bu. per acre, soybean carryover should go negative. With strong Chinese demand expected to stay in play, I’m not sure exactly how high soybeans can climb, but I expect it will be to an all-time high.
Focus on locking up a solid price and lay off the risk of upside potential by creating a limited risk vertical call strategy rather than going for broke and not selling anything.

Wheat

Sales index: 8

Wheat is kind of caught in the middle between corn and soybeans. If USDA is correct and U.S. producers plant additional wheat acres in addition to a possible global increase in wheat production, it’s difficult to see much upside potential for wheat.

On the other hand, since corn is so strong, it’s helping to increase the demand for feed wheat at this time. Near-term price prospects for wheat are entirely related to corn and outside market forces. I hope wheat producers have already sold a significant portion of their 2011 inventory above $8 or $9. Sell wheat inventory straight out of the field instead of storing it.

Your primary focus now should be on selling the July 2012 contract if it is able to move higher as June and July approach. Since prices are well above $9 at press time, I suggest selling at least 25% now and another 25% at $9.50 or better. Plan to use any correction into the fall to buy upside call protection just in case the wheat market has a supply issue as we move into the winter of 2011.

Cattle

Sales index: 9

The cattle complex has been able to push the June contract to just under $122 per cwt. (up more than $30.95 per cwt. in less than one year). This remarkable rally has been attributed to the lowest herd size since the early 1950s and persistent but slow recovery in the general economy lifting consumer demand.

These two positive developments have helped cattle feeders fend off the influence of higher corn and soybean meal prices; but this good fortune is coming to an end for producers. The market is now reaching price levels where pushback is going to occur at the retail level by consumers. While cookout season is near, prepare for an easing of consumer desire to pay for higher-priced beef products as we move much past midsummer.

My suggestion for farmers and feeders is simple: If a profit margin cannot be locked up when you buy the feeders, don’t buy. This means October cattle selling at $122 per cwt. or better are at a level you need to sell immediately. Use the futures to establish short positions on all cattle inventory from June to December at April 2011 values rather than a long put strategy. The time value premium is simply too large.

In regard to feed supplies, you must get actual control of your cash inventory. I’m worried about cash supplies from May to September. The basis could really jump if a producer or feeder is protecting his feed needs strictly with the futures market.

Hogs

Sales index: 9

The June hog chart developed a dangerous double top at $104 per cwt. While I’m not hearing too much about herd expansion, I figure it has got to be on the minds of producers, given current profit levels. The problem is that hog producers, like cattle producers, are going to have to start worrying about how much pushback there will be from consumers in the face of higher retail food costs. This is why producers must move into high gear now on developing a defensive position on last quarter and fourth quarter 2011 hog prices. I’m not bearish because of an increase in supply; my concern is with the cracks in the demand side of the equation.

Unlike the cattle market, I favor a more defensive position in hogs. Since the December 2011 hog contract is more than $15 discounted to the June contract at press time, it is difficult to get excited about producers forward cash selling or selling margin futures. Instead, look at buying the $88 December put and selling the $70 put for about $4 premium to protect $18 of risk. In this situation, hold out hope that put insurance is not needed and the market rallies.

If we are lucky and the December contract does go close to $100 per cwt., you could be $12 better off in the futures minus the $4 premium paid or $8 better off than selling cash or futures. Again, it’s a matter of being a little cautious; get a floor under the market just in case we do experience an end-of-year correction, but hope for a continuation of the good times.

Outside Markets

At press time, interest rates are flat. The 10-year T-notes are trading in a rather tight range as the Federal Reserve continues an easy money policy. Be on alert for any move back to the 122 to 124 range to resume a solid selling strategy for long-term interest rate growth.

Crude oil.

Crude oil has moved to levels we haven’t seen this high since the spring of 2008. Continued uncertainty over the Middle East conflicts and how things will look after the violence ends is forcing many end users to bid up cash inventory.

It appears we still have plenty of supply; it’s simply uncertainty about the future that is driving the market. Get all of your fuel needs locked up, if possible. Just remember that if crude oil moves into the $120 to $150 per barrel range, it is positive for corn and soybeans in the short term but negative in the long term because it will have a negative impact on global economic growth rates and transportation costs.

While I’m not predicting that what happened in late 2008 to early 2009 will happen again, the potential risk of a secondary recession is growing.

The problem now is that most people have used up their reserves and have limited time to rebuild their bank accounts. The implication to farmers: As policymakers are forced into a corner to control spending and raise revenue, agriculture programs could end up on the chopping block since it is perceived that producers are doing well financially.

What all of this suggests to me is that producers must be responsible and control their own profitability by protecting their profit margins.

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FEATURED IN: Farm Journal - Late Spring 2011

 
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