A new report from the Energy Information Administration confirms that there is no end in sight to increases in energy demand. This is positive for ethanol, and combined with world population growth, the long-term outlook for agriculture is bullish. However, as the late former ag secretary Earl Butz said, "you only have demand if people can afford to pay for it.” Eventually, higher prices for energy and food will slow growth.
Grain producers need to:
1.) use current income to pay off debt, rather than increase debt to avoid taxes;
2.) lock in profit margins, especially for 2009 and 2010; and
3.) start rethinking how they want to produce crops.
The agricultural revolution of the 19th and 20th centuries was based on the blessings of cheap oil. This is not the future we have in store for us, which heightens the importance of evaluating every entity of your farm operation in the near future.
Sales Index Key
Excellent sales opportunity 10
Excellent buying opportunity 1
Farmers know better than anyone that the June planted acreage report was not the final word on this corn crop. The weather will be a big determinant as to how strong prices will have to be to ration usage this winter. I expect a sideways-to-lower trading pattern to develop in July.
Livestock producers need to secure feed needs. Sellers need to buy calls to defend future sales and institute other long strategies by the August supply and demand report. I suggest a slow sales strategy at this time. Focus on locking up basis for inventory on both cash and hedge-to-arrive contracts. The big brass ring is developing a game plan to be a strong seller of 2009 and 2010 corn when the demand rationing event occurs between December and March.
The June report surprised the trade with a lower acreage figure. When combined with the flood damage and generally poor crop conditions, the market was able to surge to new contract highs. The fear of higher prices is still present and will more than likely persist until early August. My bias, however, is that long-term beans will not be as strong as corn. Acres will surface, and yield should not go below 40 bu. per acre. Aggressively look at strategies to lock up long-term prices in the 2009 contracts as the market approaches the high teens.
The wheat market is now coming out of its seasonal low period. The problem is world supplies are building due to recent high prices, and concerns are starting to develop about the size of the U.S. crop. I believe the wheat market will bounce off its lows and move sideways to higher. The degree of strength in wheat will depend on how much corn and beans move up.
Concentrate on buying July 2009 out-of-the-money wheat calls and selling out-of-the-money wheat puts to get in position to be a strong seller from December to March.
The hog market is taking a lot of the brunt of high corn prices. As a result, hog liquidation has started but at a far slower pace than anticipated. If the national corn yield falls below 145 bu. per acre and corn prices continue to climb, liquidation will start in earnest this fall. This will more than likely prompt prices to sharply drop this fall; down the road, though, prices should build to stronger levels. If you want to survive, you need to protect all feed costs for the 2009 season by no later than mid-August; consider a defensive plan to protect sales price from August to December.
Since April, the cattle market has been in a solid uptrend. We should see a seasonal correction into August. Overall, cattle supplies are in a much better balance than the pork complex, but I would not be surprised to see one more round of culling, reflecting the influence of high grain prices.
I expect the trend of feeding corn will shift to grass, wheat and distillers' grains. Some say this will affect quality and rate of gains. I believe the cattle industry is in a much better position compared with hogs and poultry because cattle can eat grass if corn gets too high; confined operations, on the other hand, have little flexibility and must feed high-priced inputs.
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/her own risk. Consult your Risk and Options 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 email@example.com. You can read daily comments from Utterback after markets close at www.farmjournal.com.