Outlook: Hold Tight to Profits

January 24, 2014 06:02 PM
 
BobUtterback Oct2011

We started 2014 with extremely frigid temperatures in the Midwest. While it could be killing bugs and even having a positive impact on soil composition and moisture conditions, I have to say Mother Nature is pushing the norms. Will supply outpace demand? Producers with large amounts of unpriced corn inventory on the farm might have painted themselves into a corner. Granted, they can hold off selling for a little while, but come early summer, the end users will know they can wait if acres get planted and trend-line yields are expected.

I know many are saying, "You bears are always negative." I have to admit I was bearish during the spring of 2011 and 2012, and some producers got burned being bearish unless they exercised good risk-management practices. This year will be no different.

In my opinion, producers should take advantage of early reasonable prices, but if serious concern about acres or yield develops between May and June, you must adjust risk from a net short futures or cash position to a long put position. Having a plan that integrates crop insurance with futures and option strategies plus cash sales is a must this year in order to get through the year with limited negative financial impact on the bottom line.

Corn 12345 6 78910

The price bias from January to July clearly favors the uptrend, and producers know it! Depending on how we figure the numbers, lead-month corn values in July are normally 108% of the yearly average price. This tendency for higher prices and the perceived high costs invested in the 2013 crop have producers holding a high percentage of the crop still unpriced. While I don’t have exact numbers as I write this, I would not be surprised if more than 60% of the 2013 crop is unpriced.

While producers are inclined to try to starve the market, I have to say the opportunity for the corn market is limited. While lead-month prices below $4 is difficult to argue, it’s very difficult to argue summer values much higher than $4.75 at this time.

It’s also hard to get producers to price next year’s product when there is a large amount of unpriced inventory on farm. This is the situation developing for 2014.

We cannot count on unexpected demand growth in exports, feed usage or ethanol. We will be hard pressed to meet USDA’s initial estimates, as it is. As the market focuses on spring planting, projected planted acres and yield potential, I fear producers might wait until July for price confirmation, and the highs will have passed them by.

If we figure the average lead-month high for corn since 1970, the low can be projected around 25% lower. For example, assume an early 2014 lead-month high of $4.75. If prices stay around the average, you could project a lead-month corn contract average low to be $3.57—before basis adjustment. If acreage and yield indicate potential production at more than 13.9 billion, carryover will increase in 2014, and sharply lower values will be needed to clear inventory.

Strategy: Dump old crop inventory and, if upside risk protection is desired, maintain ownership in a very conservative, limited-cost call strategy.

For new crop, be at least 50% priced for 2014 once December corn gets above $4.50. Once your crop is in the ground, move toward 100% of an aver­age crop. I prefer being long deep-in-the-money puts until we get past late June, then roll into cash or futures sales. If you have to sell excess corn off the combine, immediately lock up fall basis. It could be really mean if corn yields exceed 162 bu. per acre!

Beans  123456 7 8910

Beans were the leader in fall 2013 as China’s demand really stepped up and USDA pushed up projections in the November and December reports.

Cracks in the demand outlook are starting to surface, however. The trade is concerned that demand will not meet projections because of China’s internal demand projections.

The soybean crop in South America seems to be improving. Coupled with concern that South American producers have been slow sellers of 2013 inven­tory, there could be a backlog of  beans hitting the marketplace soon. Once this starts, China could start cancelling purchases from the U.S.

The possibility of higher U.S. soybean acres now seems to be a very strong reality. Therefore, I suggest a lead-month high of $13.50—a 25% drop in price puts lead-month value below $10 by next fall, coupled with serious basis exposure.

My suggestion is simple: All of the 2013 crop should already be sold. If not, get it done. If you can’t stand to be out of the 2013 crop, place some type of limited vertical call strategy using the July contract, but stay away from futures. Keep your cash flow for defending 2014 production.

My new crop soybean strategy is similar to corn. Have downside price protection in place but have a plan if upside price breakouts occur because of weather. A close in November soybeans above $12.25 requires a defensive strategy adjustment for sellers.

Wheat 123456 7 8910

The wheat market took a real hit late in 2013 and has not rebounded off an extremely oversold condition. Global wheat production seems to be solid. Domestically, with widespread snow cover in early January, winter injury could be limited. Subsequently, excess wheat inventory might put serious pressure on corn as a feed substitute.

The problem is that once we get past March, the clock is increasingly ticking in favor of the bear. While I assume those following my recommendations have rolled all hedges forward to capture carry, I fear the majority of producers are unpriced. So the strategy for wheat producers is just like that of corn and soybeans—place a stop on excessive downside seasonal price risk but have enough flexibility to improve the net selling price if any type of supply event develops.

The objective is to stop the bleeding but not limit upside potential if there is unexpected price recovery. If you sell off the combine, get it done and then aggressively reown if July wheat makes new monthly highs. An alterative is to buy at-the-money puts and sell 75¢ or deeper out-of-the-money puts to reduce cost. Since the market is so oversold, refrain from selling calls unless it is an obvious overbought situation.

Bob Utterback writes from New Richmond, Ind. More than 30 years of commodity insight helps Bob Utterback guide farmers through a disciplined approach to marketing.

More than 30 years of commodity insight helps Bob Utterback guide farmers through a disciplined approach to marketing. Contact Bob:

E-mail: butterback@farmjournal.com

Website: farmjournal.com/outlook

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