Stay open and flexible as you look at old crop/new crop profit spreads in the coming year
The nation’s top crop analysts are spread across the marketing map, from extremely bullish to extremely bearish, when it comes to corn and soybean prices. Opinions vary on how producers should protect themselves from market fluctuation, although many suggest using put and call options as an insurance policy on both ends of the price spectrum. As you prepare your marketing strategies for the new year, keep the following advice from these 15 experts close at hand.
Grains will be a tale of two markets. This year’s historic drought resulted in extremely tight 2012/13 corn and bean stocks, which should provide underlying support as we move into the new year.
A subpar soybean harvest earlier this year left South Americans with fewer exports. Support for soybeans should last into the first quarter, when—barring a major South American weather event—a record crop will hit export markets.
Corn has the tightest stocks-to-use ratio since 1995/96, which likely means big swings in cash and basis markets as end users scramble to get physical commodities. This could last until we are confident of trend-line production for next year’s corn crop or more evidence of demand destruction surfaces.
Old crop corn and soybeans will see extreme volatility in the months ahead.
For those who are willing to hold their crop for basis gains, hedging futures and waiting for the tight stock basis situation to play out will offer decent profit potential.
For the 2013 crop, the market continues to offer profit opportunities. Take advantage of them. If you prefer to maintain some marketing flexibility, use futures and options instead of the cash market. For those who do not want to deal with the Chicago Board of Trade, cash prices are still an attractive option for next year’s crop.
Corn and soybean prices are expected to be highly volatile. With low ending stocks, there’s little vroom for downward production adjustments or increases in usage.
The South American growing season is underway, and it’s possible we’ll see record soybean production. Weak demand for corn exports and a potential increase in U.S. soybean yields offset bullish trends. With record exports, Brazil corn is displacing U.S. corn in some markets. China could surprise the market, if its corn crop falls short and demand grows faster than projected. On the other hand, if China’s appetite for soybeans slows, U.S. exports could fall short.
Upside market potential is high, but so is downside risk. As a result, consider an options-based
strategy, which establishes a floor but leaves the upside open. An alternative is to make cash sales if basis is favorable and purchase call options.
Crops this year ended up better than we feared, which created higher than expected supplies. There is a big disconnect between the old and new (2013) crop. With corn trading in the $6.80 to $7.50 range and the potential to fall to $5.80 by June, I’d sell now. Corn above $7.25 and basis nearly 50¢ above the board is a good time to sell; I wouldn’t store.
However, this strategy all changes if you expect adverse weather in the coming months. Then you would protect yourself on the upside with a call option. Many see the potential for corn to hit $8 to $9 per bushel based when compared to similar supply years such as 1995, but 2012/13 is not all like 1995.
The key difference is inflation in grain prices. Normal weather could give us 2 billion bushels in carryover by next fall and a huge drop in prices. A similar situation exists in soybeans.
Globally, anything approaching normal weather in 2013 will boost stocks and prices will decline. Old crop corn and soybean stocks are tight, but by next fall, soybeans could easily be $12.50. The biggest price risk for both crops is what happens to planted acres next spring.
Issues are at play in the markets that go far beyond supply and demand fundamentals. Hedge funds at the moment are largely absent, and to drive prices of corn and soybeans higher, they would have to re-enter grain markets. This is a huge factor.
Big bull commodity markets are generally followed by big bears. That’s our 2013 position for corn and soybeans. With one of the biggest bull markets in history in 2012, we expect prices to trend lower into late summer, unless the Midwest experiences major production problems again.
In September, we advised producers to sell 70% of the corn crop and 60% of the soybean crop. We have also advised producers to be aggressive on hedging 2013/14 crops. When markets are inverted (nearby futures higher than deferred), it is not a good year to store.
How low is low? Obviously the answer to this question depends on growing conditions in the spring and summer. Nevertheless, if normal weather conditions occur, the downside objective in nearby corn futures will be $5 or possibly lower, and in soybeans it will be $13 or lower. November 2013 beans could trade under $12 per bushel. This is a good year to be an aggressive marketer.
Because Chinese soybean demand has been voracious, look for a $14.50 to $17 range until more is known about South America’s yield. If yield looks to be superb, futures’ prices could slide to the lower end of that range. Should the weather look ominous with less than stellar yields, prices will likely retest the highs we saw this summer.
For corn, as tight as our stocks are, end users will continue to buy as they need it, so as not to excite the market and cause it to go irrationally higher. Corn will trade in the $7.25 to $8.25
range until January.
If we have perfect growing conditions in South America and adequate precipitation in the U.S. this winter, prices could go below $7 on the board. However, we need fall rain and good snow to replenish moisture. I am bullish on corn because absolutely perfect weather conditions are required between now and spring for a good crop, long-term.
Producers should prepare for both bullish and bearish scenarios. Keep making incremental sales as prices go to the high end of trading ranges. Pay attention and know the charts. In case prices break through a technical resistance, have a plan in place that allows you to re-own your crop. Establish price levels where you want to make cash sales. If prices meet those levels, be prepared
and have your orders ready.
A word on wheat: If the Black Sea region suddenly halts exports for whatever reason, wheat and corn markets will take a jump here.
Ending stocks are snug for 2013. Export expectations have been sharply cut, as have those for industrial use. Livestock producers made modest cutbacks, but not enough to meet USDA’s estimate.
Prices could be held back by a potential record corn crop in 2013 unless soybeans bid away acres. On soybeans, any significant sell-off tied to fund liquidation or a large South American crop will add export demand. The biggest bull argument: We oversell soybean supplies, which could convince crushers to shut down or export customers to sell back contracts.
Looking long-term for soybeans, I’m a market bear because I expect South American production to be at least 94% of USDA’s November estimate—still too many beans. I’m concerned about black swan events, mostly in the macro sector: the European debt crisis and its undiscovered U.S. twin.
For marketing strategies: 1) Control margin exposure. Don’t make big input cost commitments without offsetting forward sales or price floors. High fixed costs can be a killer if you don’t lock in the revenue side. 2) Options spreads and their cash market equivalents are probably the sanest way to ride out market volatility while protecting margins and capturing upside opportunities.
Next year looks like déjà vu. World grain stocks are very low, which will prevent low prices. Larger moves are often caused by funds moving in and out of markets. This fall we saw a paring down of hedge fund positions, causing prices to sink, but this is temporary. I expect prices to bottom out soon and test alltime highs in corn, wheat and soybeans.
Outside influences are potentially more bullish in 2013. World governments are printing money to spur economic growth. When growth happens, look out. You will see too much money chasing too few goods. Be cautious on new crop sales; take a wait-and-see attitude.
On a scale of 1-10, put me down as a 10. I’m so bullish I am growing horns!
Top Third Ag Marketing
While corn export and ethanol demand suffers due to the high prices, feed usage remains strong. The market will try to ration until South American supplies are available. Corn growing countries will ramp up supply to meet demand. The length of fund long positions remains a problem. If South America has a decent growing season and next year’s U.S. weather is normal, world corn stocks will swell. Look for opportunities to sell 2013 new crop corn from $6.50 to $7.
August rains helped save the soybean crop. I expect final bean yields to be higher than the October estimate; however, carryouts remain tight as China’s appetite has not waned. Soybean supplies could remain tight through March or until the market perceives the U.S. soybean crop is 50 million to 100 million bushels above current production estimates. The Brazilian crop could run up to 83 million metric tons (mmt) with good weather. USDA raised world carryouts to 57.6 mmt, which might be too high to sustain $15.50 soybean prices. As in corn, the funds’ long positions in soybeans and meal remain a problem. I would look to price new crop beans on rallies in the first quarter of 2013.
I’m long-term bullish. Domestic supplies will be tight through the 2012/13 marketing year. The key will be demand. The greatest threat is the global economy. Another year of macro-economic uncertainty could keep prices from reflecting fundamentals.
The possible surprise event for 2013 is weather. After this year’s historic drought, soil moisture is limited. With El Niño showing signs of fading, soil moisture possibly won’t be replenished for 2013. Also, a fading El Niño might not allow South American bean production to be as large as
anticipated. Weather could be an even more surprising event next year than it was this year.
Because of macroeconomic concerns, it’s imperative to take advantage of strong price rallies with aggressive sales. But if El Niño doesn’t develop, be prepared to keep some supplies unpriced for a summer price rally and/or open upside price potential with call options.
Archer Financial Services
The market’s function will be to ration supply in the first and second quarters of 2013 for livestock, which accounts for 62% of total feed use. As in 1996, this job has not yet been completed. In 1996, this showed up in the March corn quarterly stocks report, and 2013 will likely show the same results. Exports and ethanol production are on the right pace, but without curtailing feed use we will have no supply by July. This will not happen simply by taking prices higher.
I believe the crop is larger than the October report, but it’s too early to be assured of a big South American crop. The problem will be getting this crop out fast enough into export channels, which South American exporters do not have the infrastructure to handle. Corn will be dicey March through May, but if South American soybeans increase by 35 mmt, prices will be capped.
I am bullish on corn, but the upside might be limited due to slowing demand. Spreads are not providing enough incentive to store, given strong fall basis. Scale up orders in the cash market to clean up sales before yearend. For producers wanting upside potential, look to March calls to take us through January reports.
I don’t see USDA’s ethanol demand estimate of 4.5 billion bushels changing without sharp energy price rallies. World carryouts are at the tightest stocks-to-use level since 1974, and I expect
strong price support.
Soybean production has increased from USDA’s September estimate, but demand has kept pace. China’s appetite for U.S. soybeans has been unprecedented. Any further supply increases will likely be offset by higher export demand. We are counting on South America to replenish world supply, and prices will be sensitive to weather forecasts. Strong cash basis and frontmonth
premiums indicate it’s time to sell cash beans now and re-own with calls in March through May.
Ag and Investment Services
Corn and soybeans hold potential for new highs in 2013. We’ve done little to ration corn supplies for pork and poultry. Beef production holds, as animals have been fed to heavier weights to adjust for a tighter supply of feeder calves. World supplies are tight, with Argentina’s corn production down from last year while Brazil’s will increase, and China’s will probably stay the same.
The kicker for corn is that world wheat stocks are becoming tight as well. World stocks were lowered by 4.7 mmt, down from 25.17 mmt in 2011.
World bean stocks have increased in anticipation of a big South American crop, although U.S. carryout is still tight. Brazil looks to expand, but its infrastructure will have problems handling
the crop, aiding U.S. exports.
Forecasts for China’s economic growth indicates a slowing to 6.5% to 7.7%. The biggest issue for Chinese leaders will be keeping unrest at bay. Fighting food inflation will be a concern in many
countries. This comes at a time of adverse global weather and strong food demand.
The unknown for 2013 is weather in the Midwest. The CRB Index (a commodity price index) has a potential head-and-shoulders formation taking shape on the charts. If this continues, extremely
high prices could develop.
For now, I would be patient in making cash sales. The market saw a typical harvest correction. The best is yet to come.
First Capitol Ag
Harvest pressure has brought value to buyers. This will likely not last long. With tight balance sheets, corn and soybeans are poised for a winter rally.
The watch point for soybeans will be South American weather and its impact on the record acreage being planted. If weather remains dry, higher prices will likely develop as we approach planting season and soybeans battle for acreage. If weather hints at large production, soybeans will forfeit ground easily to corn.
Corn prices will be at the mercy of weather as well. The U.S. must produce an average to above-average crop in order to bring world supplies back to a more manageable level. In a world of just-in-time inventories, any reduction in production and/or stocks will make the case for strong prices for multiple years. Another dry growing season will cause prices to be well supported, while the contrary will allow prices to soften once safely through pollination.
Next year has the potential to be the most volatile in history. While we can not deny the bullish market slant, global economies cast a long shadow and will provide resistance to upside market potential. Unforeseen events can change the entire picture overnight. Therefore, producers should evaluate making small sales on next year’s production and use put options to defend
Utterback Marketing Services
Three primary game changers are in the mix: the potential global economic slowdown, political reaction to global deflation and any unexpected yield reduction event. All three events happened in 2012. We could see continued European economic weakness in the first part of 2013, which could pull down China’s economy, as well as ours. One would think the ag commodity supply/demand report would have been bearish, but two things happened: governments are working to keep food prices low and drought hit the U.S.
The market will keep prices strong enough to encourage stocks rebuilding, but not high enough to kill demand. Prices are still posting some of the highest levels seen at this time of year. The problem is that deferred contracts (corn below $7 and $13.50 soybeans) seem low when compared with the current flat price potential of new highs if a South American or U.S. weather event develops.
Be an aggressive scale-up seller of 2013 (September corn contract above $6.95 and November 2013 soybeans at $13.85 or better) via a deep-in-themoney put at the maximum cash flow. Then focus on selling lead-month deepout-of-the-money puts to help pay for the time, value and operational costs of the expensive puts. If we experience another weather event, cash flow exposure should be capped and producers have the opportunity to gain in the net selling price if prices rally. On the other hand, if crops get planted, are stored "too" long after harvest and prices drop sharply, a floor is in place and there is little or no need to panic about what to do with unpriced 2013 grain put in the bins next fall close to the cost of production.
Look for soybeans to trade sideways heading into the new year, keying off South American weather for price direction. The "good" U.S. soybean yields should add supply to future USDA reports, dampening the need for large demand rationing and buying time for global end users to roll the dice on a large Brazilian soybean crop. El Niño weather years provide good growing conditions for South America.
In October, USDA provided hard evidence of rationing ethanol and exports, while proof of cuts in feed use will not occur until quarterly stocks reports in January and March. USDA has U.S. exports at a more than 30-year low. Flip the coin over, and despite high prices, global corn use last year was higher than expected.
Recent purchases of U.S. corn by the Chinese tell us that when prices get low enough they will buy and make their own market bottoms. China continues to have a large need for feed grains. The
long-term seasonal suggest a market bottom around this time of year and nonpriced/noncontracted corn will go to on-farm storage. A phenomenal amount of storage has been put up.
Europe continues to be an ongoing issue with huge risk to all markets. A lower Euro and higher Dollar index means lower grain prices for producers. Also some sort of tampering with the renewable fuel standards could be damaging to corn prices.
Whatever you don’t have sold, put it in your bin and play the basis.
Final production numbers are in flux and market volatility is on the rise. Make plans to join us at the Top Producer Seminar, Jan. 30–Feb. 1 in Chicago, Ill., to gain insight and tips from many of the market analysts featured in this story.
This material includes analysis by company employees. By accepting it, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that the above marketing services believe are reliable. The analysts do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice will result in profitable trades.
- Mid-November 2012