The oilseed, grain and livestock markets all came out of the fall doldrums and really extended their gains in February and March. The strong performance of the stock market in 2013 helped to raise expectations that global economies are recovering and demand has stabilized.
I know you get tired of me saying it, but as a farmers, you’re in business to produce a crop and then try to get a fair return on your investment. This places you in the difficult situation of hoping for a bullish trend when unpriced and a bearish trend when inventory is priced.
All I can suggest is this: When you start to sell at a profit and the market continues to move higher, it might be an opportunity to sell future production for even greater returns.
Weather will be a major player in the grain markets this year. It will work on our emotions: "Hope" that you have a good crop and a national yield-reduction event occurs. "Fear" that if you sell, the price will go higher. "Greed" that this time it will be different and a home run is possible. Don’t be the last rat out of the corn crib because there is a big rat-catching dog waiting right outside the door!
As you read this, you’re more than likely on the run, getting ready to start planting (unless you’re in the South). The market bounce in late February to early March was as much related to the expectation of cold weather as the disruption of grain from the Black Sea region. The old rule of thumb—buy the rumor, sell the fact—is a good guide. Have a floor under a large percentage of your expected 2014 inventory about a week before planters pick up the pace in the Midwest. The later we get into April to early May, the more bullish the market will be. If the crop is pretty much planted by the middle of May, then the pressure reverts back onto the bull to prove that hot, dry conditions are going to reduce spring-delayed crops.
2013 crop. Any remaining old crop corn should be priced at $4.90 basis the July contract. Do not remain open the basis; get it sold. If you believe prices are going higher, place yourself into a limited risk, vertical call strategy (July or September contract), but keep the premium cost down. If dry weather sparks a bullish breakout after the June supply and demand report, adjust the long position accordingly to open up the top side potential.
2014 crop. I hope producers have already priced a considerable portion of expected inventory and are moving back to a limited-risk strategy. You should have 75% coverage no later than the May supply and demand report. A long vertical put strategy is preferred to cash or futures. Roll all puts into futures or cash positions in late June to early July, when we are confident of planted acres and yields.
2015 crop. The biggest opportunity lies with the 2015 crop. USDA suggests a yearly average cash value of $3.30 in its recent baseline projections. If we see trend-line yields the next two years, supply will grow faster than demand. If we do see a late May to early June price event that drives
December 2015 to between $4.90 and $5.10, a 50% short futures position should be implemented with no call defense strategy. I would not start working on a defense strategy for the 2015 position until October. Again, locking up a solid price and then defending against a weather event seems more responsible than producing it and hoping the market will be bailed out. One of these days, this strategy will get buried!
The soybean sector is really a tale of two markets. The old crop is exceptionally strong because of continued Chinese buying. I don’t anticipate the old crop will get much below $13 until we are well into summer, but just as important, current high premiums are difficult to justify. Be satisfied with current prices, and get the bins cleaned up. Use any further market strength to sell expected 2014 inventory.
2014 crop. The battle of USDA numbers is on—soybean export estimates versus the potential for greater- than-expected planted acres. Exports will likely cool off and we will back off from the current 78 million metric tons—a huge overestimation—by summer. The anticipated 79.5 million planted acreage figure released at the USDA Agricultural Outlook Forum is going to go up. The only issue is how much. If we see a cold spring, soybean acres could jump above 81 million, which will place a lot pressure on November 2014 soybeans.
I’m very concerned about pricing expected 2014 production at $11.80 or better. It is imperative to have the ability to improve selling price if the market moves higher. Therefore, be long the November puts and reduce cost by selling out-of-the-money old crop puts. I would not want to be in short cash or futures until late June.
Wheat should be in a seasonal decline. The market has digested the impact of harsh weather on wheat. Are producers going to plow under any wheat?
Short positions should already be in place. It’s time to start thinking about rolling long put positions into futures or cash to avoid time value decay. As for where to park hedges, roll back to the July contract by late March to take advantage of any widening of the spreads as harvest nears.
Be warned—I expect speculative interest will be attracted to selling July wheat and buying corn, placing additional pressure on the harvest delivery time period. The only real hope for wheat prices to rally into summer is if the corn complex gets into a weather bull market and pulls up wheat.
Summary: It is time to use short cash and futures to reduce the cost of options. It is time to get in position to capture any increase in carry. If we see a seasonal price fall into May or June, feed buyers need to start developing their long buying plan.
This market has already seen record highs this year, but by the time you read this, we should have most of the fundamental uncertainty about supply factored into the market. Then the issue will quickly become: How high can prices go before the consumers say it’s too much?
The big premiums during summer months versus the October and December contracts will probably allow these months to firm up as we move into summer. In fact, if we start seeing any type of herd rebuilding, it will only reduce the available inventory numbers we see this fall—when we expect expansion to start anyway.
Hog producers need to get a plan in place this summer to protect late 2015 and beyond price-risk exposure. With these historic high profit margins, it is only a matter of time before demand adjusts downward and production adjusts upward. It is time to start scaling in.
Tighten your focus. Be cautious until we get a technical confirmation of a top. Keep hedging in the deferred contracts. The target time period to start selling is June to August.
For now, there are no target prices. Get to the bank and get lines of credit established, get accounts opened up and start placing modest orders above and below the market with the intent of increasing this coverage as summer continues to develop.
Cattlemen with unpriced inventory in the pen and no sales made are very happy. If anyone hedged below the market, they wish they never heard about futures and hedging.
The exceptional market rally in cattle has the bull in full control right now. Demand has not reacted to higher prices, while inventory numbers are stagnate and weights are still high.
I suspect that the retail system is reluctant to push up retail prices too drastically because of the overall negative impact on consumer demand. This can’t last long, though. The problem is the retail chain will start pushing prices up right when demand seasonally increases since cook-out season is right around the corner.
Don’t fight this market with straight short futures or cash sales. This is a situation where a floor should be kept under the market at breakeven and leave the upside open. Prices should remain firm throughout most of the summer since the hog market is under so much stress with its lower inventory numbers.
Again, I can’t stress enough the long-term risk we run. All I know is that these exceptionally high prices will start to ration demand and increase production—domestically and internationally. This will eventually lead to lower profit margins.
2015 cattle. Now is the time to start looking at a 2015 defensive strategy. I suggest producers consider selling the deferred using futures, then come back into the market during the summer or fall months and have a plan to use a vertical call to defend upside risk exposure on technical breakouts. This would create a synthetic put position, but it does not reduce all the cash flow risk of the futures to merely offset the loss potential if the market does rally.
Again, start getting a floor under the deferred on technical weakness this summer and defend with a long call strategy on technical breakouts. I know this strategy is not as clean as many would want, but these are unusual times that require maximum flexibility with a strong emphasis on cash flow preservation.
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- Early Spring 2014