In the first of our three-party series, bullish marketers discuss the forces that they think will keep prices high in 2013
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.
In the first our three-part series, let's look at what the bulls have to say. This faction generally believes that grain stocks will remain tight next year and that should keep prices high. If that's what you believe, then holding on to your crop for a while makes sense.
Click below to read the other installments in this series.
Moderates: Prepare for Upside Profits and Downside Risks
Bears Expect Rising Grain Stocks to Depress 2013 Prices
Tale of Two Markets
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.Bill Biedermann
Deja Vu All Over Again
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!
Demand Will Be Key
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.
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.
Crop Prices Could Hit New Highs
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.
Winter Rally Ahead?
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
Watch for Game Changers
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-the money 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.Doug Werling
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.
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