A cat-and-mouse scenario might be brewing. If end users develop a sense of urgency, prices could form a V-bottom.
Whether it’s one year out or three years, funding a flexible marketing strategy can be costly. Commercial firms have enhanced their hedge-to-arrive contracts to acquire ownership of the physical commodity, with some firms requiring delivery at a specific point in time as part of the agreement. For me, maintaining beneficial interest until I’m ready to dispose of my crops is a priority.
Price outlook is the most rewarding, but it also requires more effort. I try to determine what has changed that could have a major impact on my decision. I expect to make mistakes, but I want the flexibility to modify decisions so small mistakes don’t turn into big, costly ones.
Weather has interrupted our ability to meet demand twice since 2008, making price outlook more difficult and marketing flexibility more important. Had these difficulties not occurred, our quick response to increase corn production by 15 million acres in 2007 might have slowed the process of land price appreciation, as well as lessened global expansion.
The 93.5 million acres posted in 2007 produced 13 billion bushels, which was sufficient to meet demand and end the year with 1.5 billion bushels left over. Trend-line yields going forward would have allowed excess supplies to build while meeting the ethanol mandate, thus providing less competition for soybeans to meet the Chinese demand.
Present Day: A year ago, technical topping action suggested a more aggressive attack for locking in 2013 and 2014 prices while maintaining flexibility of futures. Options were hardly a second thought due to the high cost. This summer’s weather might have taken the top end off of expectations, but I think we were too low, and the corn market responded accordingly. Soybeans stocks are tighter, but it’s doubtful buyers will want to spend $14 for all of North and South American production. A normal year would have left us with huge ending stocks for corn, wheat and likely more-than-adequate soybean stocks. Speculators saw this coming and moved out of commodities into more traditional investments, as they saw the ag sector as having topped.
Phase Two. While selling out of the field worked the past two years, prices of corn fell to levels not seen for years in December futures. Excess supplies approaching 1.8 billion bushels is something many have not had to deal with for 10 years, but there is opportunity. The market puts a "carry" in the futures for old crop when supplies are in excess. Essentially the market pays the holder a "storage" premium, as the market cannot absorb all the production in the short run. Monthly carry charges are about 5¢ per month, suggesting the December/July spread is about 35¢, compared to an equivalent spread of about 19¢ in 2003. Given a good crop next year, that spread could earn another carry of 10¢ from July to September.
A V-Bottom Possible: Not only are grain bins essentially empty going into harvest, but total
on- and off-farm storage has increased nearly 3.5 billion bushels during the past eight years, offering another source of revenue for on-farm facilities. This also means farmers can put away the 2013 crop much faster than most commodity traders realize. Timing will be of the essence for end users who lack coverage.
A cat-and-mouse-type scenario might be brewing. Should end users develop a sense of urgency, prices could stabilize, forming a V-bottom with a price rally toward the end of the year.
Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, send an e-mail to firstname.lastname@example.org or call (707) 365-0601. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.
- October 2013