Sales Index Key
Excellent sales opportunity 10
Excellent buying opportunity 1
My recent work with producers has reconfirmed my conviction that knowing the numbers is essential to good marketing. I cannot underscore enough the importance of setting a reasonable target above fixed and variable costs and developing a process for implementing and managing a total-farm risk management plan.
Granted, everyone wants to sell the high, but was it wise to walk away from a more than $200 per acre return this winter with hopes of something higher? In early April, the market was offering a $50 to $60 per acre return for corn and soybeans. The risk is that producers could fall into a net loss of $50 to $75 per acre.
How do we get prices back to a minimum of $125 per acre above fixed and variable costs for corn and soybeans? There are three ways: reduce costs, increase yields or hope for sharply higher prices. The problem is that higher yields and higher prices conflict with each other. Costs may be slightly reduced with lower fertilizer prices, but the burden of getting returns now falls on a price recovery.
There are three variables at play that producers need to monitor to assess upside market potential:
If the corn crop is planted on schedule, it will most likely be a big negative for the market even if the Chinese get excited about buying short-term.
July corn may be unable to move above $4. I sense that producers will be slow sellers.
I see a big carry developing for wheat and, to some degree, corn. Commercial storage will be full of wheat, where possible. If we do plant 89.5 million acres of corn and yield is above 165 bu., there could be trouble this fall in the cash market, with basis widening to levels not seen in years.
Anyone who has an open hedge-to-arrive contract should lock up basis. All hedges that have been rolled to July 2011 should be rolled to September contracts by the end of May. Plan to roll the September contract forward as carry increases into harvest. All unpriced (expected) 2010 inventory should be sold in the December contract as close to $3.95 to $4.05 as possible and hedges liquidated this fall at $3.15 to $2.95.
While U.S. farmers have done a decent job of selling old-crop soybeans, the narrow spread between July and November indicates how tight inventory could get. It has narrowed from 52¢ to 21¢, which is not what the bulls wanted to see.
Speaking of the bulls, right now the burden of proof for higher prices is square on their backs. It will take a significant weather reduction event in the U.S. crop or China surprising us with greater usage.
Take some of the current price gains for new-crop soybeans. Catch-up sellers should get at least 50% sold at the $9.40 to $9.62 level. However, I prefer to sell soybeans in the cash market, rather than mess with future contracts or put options. Lock in the basis for necessary off-the-combine cash sales and be done.
The wheat market is a wreck, but it is not the time to get bearish toward flat-price action. The big concern is the huge carrying incentive ($1 per bushel) the market is offering commercial interests to hold wheat from July 2010 to July 2011. Granted, there are operational problems with holding wheat for a year. But let's assume July 2010 wheat can be purchased for $4.03 cash and immediately sold in the July 2011 contract at $5.84. Let's hope there is an opportunity to unload it at 60¢ under the July 2011 contract during the next 12 months, which would result in a net $5.24. This gives an estimated net working margin of $1.21. At 6% interest, holding $4.03 wheat for 12 months would cost 24¢. Assume 5¢ marketing and related costs and 18¢ in drying and other miscellaneous costs, and that leaves a 74¢ return. Storing wheat could make more per bushel than production!
I believe the multiple-year trading cycle low in wheat will be the July 2011 contract. If corn and soybeans stabilize this fall, buying wheat in the fall close to $4 in lead-month futures would not be all that bad as a speculative place to reown inventory.
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 or her own risk. Consult your risk disclosure 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 firstname.lastname@example.org. You can read daily comments from Utterback after markets close at www.farmjournal.com.
- Late Spring 2010