As I prepare for winter meetings throughout the Midwest, it’s a good time to talk about the big trends that I believe everyone in agriculture will face. It’s important to decide how you’re going to handle these challenges before they occur.
I believe the cost of producing grains and oilseeds will slowly come down in 2014. As profit margins shrink, the impact on all businesses serving agriculture will be immediate and acute.
I expect a drop in land values during the last half of 2014. If anyone has land to sell, don’t delay—get it sold now. For those on the buying end, if it’s possible to hold off, plan to do so until early 2015.
The next domino to fall: Who is actually taking the risk and doing the work—producers or end users? Historic high profits in the past 10 years have encouraged many older farmers to extend their active involvement in farming. If profits start to erode, there will be a faster-than-expected exit of many farmers in the next 18 months. This sets up a bear market that can provide a golden opportunity for producers looking to expand—if they’re financially prepared. Do not be surprised if end users vertically integrate downward to control the type and quality of crop by providing financing.
Another big story that is building: Midwestern livestock producers are enjoying record prices. Unfortunately, when producers experience this type of hyper-bull market, they think it will last forever. The message is clear; the best cure for high prices is high prices. Livestock producers should prepare themselves for the eventual price decline, like the feed grains and oilseed producers are experiencing.
The persistence of dry conditions in the western production regions will put increasing pressure on water regulations and the battle between agriculture and urban use. The inability to see a rebound in pasture conditions will also restrict how fast cattle herds will build in the western states. Both of these factors will only test potential weakness in land values in the western states compared with the Midwest.
In summary, agriculture might be on the edge of some significant structural changes. The opportunities far outweigh the negatives, if farmers are properly positioned.
Corn 12 3 45678910
At press time, the corn futures market is trading close to the bottom end of the trading range, as suggested by USDA cash projections. This implies that the pressure is moving from the bulls’ need to prove that prices can move higher to the bears’ ability to push prices lower. Once we get past the February cash-flow lows, we should expect a seasonal price recovery, but the intensity of the rally will be heavily weighted to spring weather patterns. Long term, I’m concerned that carryover could exceed 2 billion bushels, so this fall lead-month futures will have to spend some time below $4 in order to clear inventory.
Winter lows should be in by the time you read this. But the market is expected to be range bound until May when we have some solid numbers on spring planting conditions and acres. My greatest concern is that farmers will hold old crop corn into summer unpriced, which makes them very sensitive to a possible crash in basis from late summer to early fall.
Recommendation: Move cash inventory when it gets close to $4.40. If reownership is desired, buy July calls no later than the end of February. Focus on selling $4 or lower puts to help reduce the cost, but carefully monitor the flat price exposure if the market starts to make new lows after early May.
In regards to the 2014 crop, I assume those following my recommendations have already priced a significant amount of expected corn inventory. I strongly suggest rolling all hedges into the May 2015 contract from now through early May. Then, look for an opportunity to roll all long futures positions back to the September contract, during May on any modest spread inversion in the September or December corn contracts.
Have a solid plan in place to manage potential weather risks from April through July. Being long a deep-in-the-money put is better than a straight short futures or cash sale in most cases because you still have a floor under the market and the flexibility to improve the net selling price if the market does rally.
Beans 123456 7 8910
The soybean complex has been the strongest because lead month futures have been premium to the deferred contracts. Now that the trade is comfortable with a solid soybean crop in South America, exporters will quickly focus on buying those soybeans. Do not be surprised if China cancels some of their expected purchases from the U.S.
By the time you read this, the highs might be in. If we have any delay in spring corn planting, it will add to an already burdensome 81-million-acre expected planting figure for soybeans.
This is the year to be over-hedged in November soybeans above $11.25 to $11.50 in at-the-money puts. Once in position, roll up if opportunities develop, but above all, get a floor under all 2014 anticipated production.
If anyone has to sell off the combine, sell early rather than wait for a fall cash sale that could be well below production if yields exceed 43 bu. and planted acres exceed 81 million.
Wheat 1 2 345678910
his complex has had only one direction since last fall—down! Granted, we saw some reduced domestic acres, but it was offset by larger global production. If this was not enough, the potential for a breakout in the U.S. dollar to the upside could put even more pressure on weak exports. This is the type of market where producers have to force themselves to make some sales simply because of the time of year, and then have a plan to react if we start to see new monthly highs.
Continue to hold hedge positions in December 2014 to capture carry. Any new position should be made in a limited risk, vertical put strategy. Refrain from selling calls due to the oversold condition. Unfortunately, you should be at least 50% priced now. Remember, if corn and soybeans get nasty this fall, wheat could go below $4.75.
Livestock 12345678 9.8 10
The livestock market is living the good life—cattle and hog prices are coming off the highest prices ever. We might see some of the highest feed-to-livestock ratios in history. This will eventually entice production to increase, which reduces short-term marketing numbers. Granted, it can be offset with higher tonnage, but it takes time for expansion to develop. Livestock producers must think more about managing risk in 2015 and 2016 than in the next six months.
When the market enters times of financial stress or excessive profits, emotional control becomes difficult. That’s why having a plan to help make decisions and handle marketing risk is a must for all producers.
Bob Utterback writes from New Richmond, Ind. More than 30 years of commodity insight helps Bob Utterback guide farmers through a disciplined approach to marketing.
More than 30 years of commodity insight helps Bob Utterback guide farmers through a disciplined approach to marketing. Contact Bob:
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- Mid-February 2014