Think about it: we’ve just passed the one-year anniversary of $8 corn, and prices are still searching for a low. Throughout the years I’ve observed that in times like this, marketing is not a high priority for many farmers.
Margins are bound to get significantly tighter, so it’s even more critical to plug any holes in your marketing plan.
While the reasons are different, we are following some of the same 2008 price patterns—prices fall from the summer highs to the fall lows. In 2008 it was faster because of the implosion of the global financial markets. We subsequently had a two-year sideways trading range that only broke out to the upside when yield reduction events occurred in 2011 and 2012.
This year, prices are going down because we are seeing persistent demand softness, and it will take time to regain markets that were destroyed by the explosive prices. To top it off, yields appear to be good in the U.S., as well as around the world.
The August supply and demand report was a short-term bullish surprise to the market, which has helped to confirm a near-term low. The September and October reports should help resolve some of the big concerns about exactly how many acres were planted this spring.
Sales Index Key
- Excellent sales opportunity....10
- Excellent buying opportunity....1
During the next six months, I would not be surprised to see a tug of war develop between the bulls and the bears, as neither will be able to force a trending market. Subsequently, I expect range-bound trading until a major weather market resurfaces.
Corn 12 3 45678910
There are several things producers need to manage right now to plug the holes in their marketing plan.
Long calls: If anyone is holding long calls, they must force themselves to liquidate once we get past the September supply and demand report. Even if the positions are down to modest value, it’s better to take the money off the table than let them expire worthless.
Long puts: Due to the big price break and the possibility of a fall price recovery, if concerns with crop maturity develop, roll down any deep-in-the-money puts. It’s time to move into a limited risk vertical put spread.
Storage: Many pro- ducers have not forward sold most of this year’s production and plan to store it and forget it. Instead of closing the door and forgetting about it, it would be better to:
1) Lock up basis on all off-the-combine cash sales. Sell this inventory around the September supply and demand report. Either the market will rally because of weather influences or retest the lows as bins fill up.
2) Capitalize on full carry. I believe a significant part of the 2013 crop is unsold and will be put in the bin and stored. The risk is that the deferred contracts will fall to the nearby contract price. The end result is the producer will store for nine months, pay all of the storage costs and take it out of the bin at a lower price than when he put it in. If anyone has cash sales on the books and is planning to store, roll all forward contracts forward to the July 2014 contract to capture carry during October or November. If hedges are liquidated, protect the carry incentive being offered.
Beans 123 4 5678910
August is a critical month for soybean development. There are a few problem areas, but overall, I agree with the August yield estimates of 43 bu. to 44 bu. per acre.
While corn acres are expected to fall as the October reports near, I would not be surprised to see soybean acres actually increase. The market could experience a little bounce between November and January if South America has any problems. However, if South American farmers follow through with the early planting expectations to increase acres, the outlook for soybeans looks bleak for early 2014. Subsequently, if there is limited carrying charge incentive, focus on dumping the soybeans and storing corn. If anyone decides to store, keep the forward contracts in the deferred contract months to capture limited carry.
Wheat 12345 6 78910
As we enter the fall time period, wheat prices will need to stay firm to entice producers to plant. However, once the trade is certain that acres are planted and corn and soybean production is assured, it will be a tough time period for wheat.
Granted, I do expect a lot of professionals buying wheat and selling corn, but flat price could still be under pressure. Since we are at prices where producers will find it difficult to price, the wheat farmer for the summer of 2014 will be on the same bearish trend as corn and soybeans—too low to sell but with limited opportunity for gains unless we get a major weather event somewhere in the world.
In situations like this, sell calls on any minor bounce in the July contract at a comfortable strike price. If you can stand the pressure, sell out-of-the-money puts on oversold conditions to add value to the 2014 selling price. Finally, once short positions are established, enact an upside price defensive plan if and when a technical breakout occurs due to an unexpected change in the underlying fundamentals.
Cattle 123456 7 8910
The cattle market has fallen off its highs, but prospects of a big recovery will be limited by consumer demand and expectation that supplies will rebuild in 2014. A lot of decisions will be made in the next 90 days about placement pattern in cattle.
Since feed supplies are rebuilding, the feeder cattle price has already recovered, while deferred fat cattle prices have come under pressure. Push the pencil—if it pays to buy the feeders, then lock up the hedge from top to bottom. This is not the time to buy expensive feeders and leave open the cost of feed or the eventual selling price of fat cattle.
While it will be tricky, focus on buying cash corn inventory below $4 and hold off on forward buying meal until November or December.
In regards to fat cattle, anything above $130 is a solid sell, but focus on buying deep-in-the-money puts and roll up the position if we get any bullish surprises along the way.
Hogs 12345 6 78910
With lead-month highs above $100, the market will soon start wondering how fast producers will react and hold back gilts?
This will eventually lead to an inverted marketing situation where the nearby contracts will take off due to shortage of inventory. Producers will have a hard time selling deferred contracts because they are discounted with expectations of bigger numbers.
I have seen these inverted markets several times, and it is always a tough sale. This is when buying deep-in-the-money puts is far superior to futures or forward cash sales because there is a way to improve the net selling price if prices rally.
Summary: Hog and cattle producers are enjoying solid prices, but like all markets, we are sowing the seeds of the next bear market. Profit incentives will become too great to not produce, and we will convince ourselves this time it will be different.
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- September 2013