Farmers who expect to receive crop insurance payments need to protect themselves against a mild sell-off in futures in September and October, cautions Farm Journal economist Bob Utterback.
"I think you are forced because of the mechanics of the market to buy a put," he says.
Utterback, who advises farmers on future trades and trades himself, forecasts a short-term "correction" in corn futures followed by a spike. A sharp rise in prices is just about the last thing farmers want to happen, he said, because it can destroy confidence among grain end-users and change business behavior.
"Drought is now the No. 1 issue on major news networks," Utterback said. "The psychology of the market, which is sometimes as important as reality, is getting very bullish. This is frightening stuff."
The current bull market is being fueled by uncertainty over the drought’s toll on yields. "This why we’re getting 60 to 80 point swings in the market," he said. "The market is very, very uncomfortable with its ability to forecast yield right now."
No one is quite sure how bad off the soybean crop is. The USDA has lowered its estimate of the soybean harvest to 3.05 bu., with yields of 40.5 bu. per acre. Some private analysts believe it will be lower. Many farmers are so worried about the status of their crops that they are afraid to go out in the field and find out, Utterback said.
"We’re getting to a point where the crop may not get much worse," Utterback said, noting that no one is sure how good yields will be in the counties that haven’t been stricken by drought. "By the Pro Farmer crop tour on Aug. 23, the market will have real good handle on how good the crop is. That will play out by mid-September."
In the meantime, the nation’s corn and livestock have become a political hot potato. Concern is building over whether higher prices will cut into grain and meat supplies and fan inflation. Utterback worries that the federal government may impose export restrictions or price controls, though nothing is likely to happen until after the November elections.
"There’s a lot of political heat building that corn prices are too high," Utterback said. "Overall, the economy is shaky; it can’t tolerate a food shock right now. So unfortunately, your corn is no longer your corn; it’s their corn, and they think the price is too high.
"This is my greatest anxiety, because when the government gets involved you can’t predict what they do, and they always mess things up. If this thing continues until March and we have a long-standing food event, the government will start getting protectionist."
While livestock producers have started militating for a roll-back of ethanol mandates, Utterback believes that they aren’t rationing as fast as they need to be. The industry is just talking about the mass liquidation of cattle stock, he said, and not doing enough about it.
"Livestock producers didn’t want to buy protection in the spring, when they could have bought a call for $5," Utterback said. "Now they want someone to pay for their mistake."
Meanwhile, the greatest bull market in history is setting the stage for one of the greatest potential bear markets of all time. The average up-market in corn futures runs for 20 months, Utterback noted. The average down-market is a little longer at 26 months.
"When we find the top of this thing, probably in November or December, it will be 32 months of an up-cycle. We’re setting ourselves up for a long down-cycle," he said. "The longer you ride high, the longer the slide will be. That’s what history suggests."
Utterback said the industry may never experience a year like this one again, with the potential for a big crop in early due to warm weather driving corn prices below $6, followed by a once-in-a-generation drought that pushed them above $8.
"You young guys, 30 to 40 years from now, will be able to say, 'I remember when.' This is a history-making year. The events that will unfold this year, I’ll never see again," said the 60-year-old.
The trader expects corn prices to remain high, a cash value of $8, through next summer. He suggested that it wouldn’t be a bad idea to lock in 2013 prices now. "If the market is going to give you $7 corn, you can lock in a 35% profit margin for as long as you want to go. Your only risk is weather and the government," he said.
In the meantime, he thinks that farmers who expect to receive crop insurance payments need to protect themselves against a mild selloff in futures in September and October. If the market dropped to $7, farmers could lose a lot on crop insurance. "I think you are forced, because of the mechanics of the market, to buy a put," he said.
The biggest question in front of farmers now, as Utterback said, is how to "take advantage of this gift being given to the American grain producer." Once the futures market peaks, he suggested taking positions to capture the likely declines. He thinks there are opportunities to buy 2013 cotton and 2013 cattle futures, along with fertilizer and fuel inputs.
The financial challenge will change come the winter. From February through July of next year, farmers need to be in a "defensive position," Utterback said.
- September 2012