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Outlook: High Prices Ration Use

August 25, 2012
By: Bob Utterback, Farm Journal Columnist
 
 

Normally the last days of summer are for vacations and relaxation before fall starts. This year, however, will go down in the record books as one with the biggest swings in corn and soybean conditions for the Midwest. I think one of the measuring sticks for a drought is how far the supply is below the 10-year trend line. The August USDA supply and demand report gave us an indication of how bad it is—corn yields of 123 bu. per acre and soybean yields of 36 bu. per acre. That has to be a surprise to the trade. The issue now is how much more they will drop. I expect corn to drop below 120 bu. per acre and soybeans to remain close to the August estimate.

How high will prices have to move before usage is rationed? There are rumors that politicians are talking about reducing ethanol mandates. It sounds good for the consumers back home, but they don’t understand that reducing mandates will help the livestock industry and hurt the corn and soybean producers. Corn and soybean growers need to stand together now to help each other and not allow short-term programs to destroy their long-term demand structure.

I have total faith in the economic system that gives rise to the famous saying "The best cure for high prices is high prices," which leads to the bear’s battle cry, "Short crops have long tails!"
Tell your political contacts, "Thanks, but just leave the market alone and allow it to work!"


 


Sales index:

10 = Excellent sales opportunity

1 = Excellent buying opportunity


Corn: 10

This is the first time I’ve put a 10 in the sell ranking. Conditions are developing for a long-term top in the corn market. My only concern is that the 2012 high will not be like the 1988 high, where prices topped out in less than three months. I would contend we are going to see a pattern much like that of 1996, where it took almost six months to confirm a high. I expect the final high will be put in by an exceptionally strong cash market and more acres in 2013.

When will the high come? Anyone who has unpriced 2012 inventory is in the driver’s seat. Remain unpriced as long as December corn can stay above $7.65. Obviously, this floor should be moved up as the market rallies, but give the market room to work. It would also be prudent to remain long the basis this year because cash will likely be tight, with average yields below 123 bu. per acre.

Before Thanksgiving is a good bet for the futures high to come, but next spring for basis. Then we have to watch winter weather conditions. If moisture returns to the Midwest, the high will be confirmed; but if dry conditions persist, expect new highs next summer on extremely tight stocks and concern about next year’s crop.

The key point is that this market will be more active and violent the higher it goes. Once you are satisfied with the price, take it and move on to 2013. Don’t speculate and try to buy back at these price levels.

I’m already working with producers to develop a plan to lock up a price in excess of $7 for their anticipated 2013 crop and $7.50 for their anticipated 2014 crop, with limited margin risk exposure if a weather event occurs next year. You might ask, Why not wait until I know I have a crop? My answer: Once the uncertainty is gone, so is the good pricing opportunity.

To get started on 2013 marketing, it is critical that producers work hard right now to lock up their input costs for 2013. Throughout the years, I’ve learned that it is almost impossible for producers to sell a crop if they don’t know what their input costs are—so get it done.

In the future, I will discuss how to use spreads and short put strategies to enhance the core selling prices and achieve returns on investment in excess of 35%. It’s an exciting time for producers to ensure profits for the future. Long live the bear!

 

Beans: 8

The world soybean stock situation is possibly even more dangerous than the corn situation. With the short South American crop and the confirmed drought damage to U.S. soybean production, the price impact on ration usage could be significant.

For the expected 2012 crop: If the market reaches the desired target price, sell via a futures position rather than pricing out in the cash market because of the possibility of significant improvement in the basis.

My suggestion for 2013 is similar to the corn strategy. Lock up inputs. Start looking hard at selling November 2013 in excess of $13.50 or better. Expect a lot of volatility during December and January. If South America’s big acres start to look good, convert to a put rather than a short futures contract.
 

Wheat: 9

Anticipated wheat prices for 2013 are close to $8.50 or higher. This should help to encourage a lot of wheat acres for next year.

Another issue that supports more acres, especially in areas where wheat thrives, is the drought. Producers will need revenue as soon as possible, even with crop insurance payments. The reaction to the August report was bearish, which suggests the wheat market is starting to struggle. I urge producers to scale up selling as corn rebounds into Thanksgiving.


Cattle: 2

This year’s drought is adding more misery for the cattle producer. Pastures are burned up, as well as feedstocks. We are seeing lighter weights, which suggests that further herd liquidation is under way. When we combine this with dairy herd liquidation, the beef supplies available to the consumer will be significantly less in 2013.

Cattle producers who are able to maintain their herd numbers should immediately protect all feed needs until the 2013 crop can be secured. In reference to price protection of inventory, maintain coverage for the next two to three months; after that, price protection is suggested only if banks require it. If so, place protection in out-of-the-money puts only at break-even. I do not recommend selling futures.


Hogs: 3

Now that concern about corn and soybean yields has been confirmed, hog producers are heading for some severe pain next year in regard to feed costs. The offsetting factor is that we are already hearing about modest sow herd liquidation, but significant reduction will be necessary if we are to reduce feed usage as much as USDA suggests. This implies that during the next six months there could be sharper than expected price reductions in fat hogs. The implication is clear: Price protection is necessary through the last quarter of 2012.

The good news: Once the herd flush hits, the resulting loss of inventory should cause prices to significantly climb in the latter part of 2013. The only limitation is how high the market can go before consumers rebel against higher food prices.

The pressing issue is for all hog producers to get their corn and soybean meal needs bought through the fall of 2013. It is ideal to have control of cash inventory. This, however, is impractical for many producers, so buy deep-in-the-money serial calls rather than futures to cap cash flow exposure.
 

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FEATURED IN: Farm Journal - September 2012

 
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