Every year, the markets make a fresh start. There are great expectations and hopes for good yields and prices. This year is starting out no different, but there are more storm clouds on the horizon than usual.
The macro economy is uncertain. Many market watchers are suggesting we are merely in a cyclical downturn. All that is needed, they say, is more consumers spending and the rich to pay more of their fair share. On the other side of the argument, there are those who suggest that we are not merely in a cycle low, we are in the final stages of a bubble economy and fiscal and monetary restraints are needed. They argue that we have seen the housing market crash and the consumer debt crash, but the big bubble of government debt and a weak U.S. dollar are yet to come.
Regardless of which side of the argument you believe, you still cannot afford to ignore the extensive market price movement in 2013 and beyond. This will have a tremendous impact on every producer’s strategy to protect his or her farm assets.
Uncertainty about the strength of domestic and global demand for grains and oilseeds are already causing concerns, as is the issue of consumer pushback because of high beef and pork retail prices.
As if these two factors were not causing enough insecurity in the fundamentals, there are considerable concerns about the potential of another yield reduction event due to weather in 2013.
For now, keep a tight rein on risk exposure. Consider using the federal subsidy crop insurance program and an integrated marketing program to maximize profit.
Sales Index Key
Excellent sales opportunity...... 10
Excellent buying opportunity..... 1
Finally, if we do see a yield reduction event this summer, use that rally to extend your coverage into 2014 via the futures markets because eventually the best cure for high prices is high prices!
Corn 12345 6 78910
The corn market corrected after the August highs and is now hovering within a tight trading range in the old crop. Expectation is still high that lead-month corn will spend limited time below $7—but it will also spend limited time above $8. The cash basis level will continue to be extremely strong as end users acquire inventory in a tight stocks environment. Midwest producers should take a cash bid as close to $8 as soon as possible and not hold until the summer for the weather scare event.
Normally I’m bearish and recommend being a strong seller of December 2013 corn above $6.45 to $6.65. Now people seem to be more bearish than me! It seems like they want to use a trend-line yield of 160 bu., which, when combined with a 98-million-acre crop, should lead to a significant increase in carryover.
We might get undermargined producers to panic-sell in January and February but be unable to handle a weather scare in May or June. Anyone who wants to sell inventory now should use a deep-in-the-money put and stay away from all cash, forward cash and short futures contracts until June 15 or later.
Beans 12345 6 78910
The soybean situation is just like corn. The old crop is very tight, but bearish concern is developing for the new crop. If early projections of 80 million acres are realized in the U.S., along with a rather big South American crop, it might be difficult for November 2013 soybeans to get above $13.50 unless we see a serious summer yield reduction event driving soybean yields below 37 bu.
Unfortunately, we will not know this until we are well into August, so producers need to have at least half of their expected 2013 soybean crop sold via a deep-in-the-money put below $14. Again, refrain from cash, forward cash or futures contract sales until late summer because of the explosive upside risk if a drought event should occur.
The tightest supply time period for old crop soybeans will be during the first quarter of 2013. The biggest hope for producers with high-priced soybeans in the bin is weather stress in South America—otherwise a lot of old crop soybeans will be held all the way to July or August. I know producers have been bailed out the past two summers, but it’s not a speculative venture. Eventually, they will get caught holding the bag.
Wheat 123456 7 8910
The wheat market is scary. On one side of the equation, we still have plenty of global supply. The Chicago wheat production region will most likely see more wheat acres planted and crop conditions will remain stable. The real concern will be with the western wheat production region: Kansas City wheat could do exceptionally better than Chicago wheat, which many traders are capitalizing on.
I believe Chicago wheat producers need to be more aggressive in pricing expected production between $8.50 and $9. The biggest challenge is if weather concerns can pull up the Kansas City wheat or corn markets this summer. For this reason, I still suggest using deep-in-the-money options rather than selling futures or cash. Again, it’s about having a floor strategy in place, allowing farmers to benefit if some upside price strength is realized by summer.
Cattle 123456 7 8910
Cattle prices have backed off, along with grain prices, as speculators have generally become less excited about commodities. It is not an issue of oversupply or high weights; the primary concern is how much consumers are willing to pay for beef.
Some suggest cattle prices will move to record highs during the spring and summer months. While
there is merit to this argument, concern about the domestic economy will likely keep most consumers on the defensive, making it difficult to argue for sharply higher beef values at the grocery counter.
Don’t limit your upside potential, though. Be long in a vertical bear put strategy below the market and leave the upside open during the first half of the year. Your first order of business is to ensure feed supplies are locked up in the cash market to avoid basis and flat price risk exposure. If you are using a lot of borrowed capital, stay with short-term rates and watch the bond market for a longterm signal that interest rates should be locked up.
Hogs 123456 7 8910
The seasonal signs in the hog market point to a period of weakness from February to April. Since prices have come off strong levels in 2012 for the April 2013 contract, it will be difficult for the market to get April hogs back above contract highs. If the market gets close to the highs, lock up all inventory for the first quarter of 2013 in futures or cash sales if the basis is acceptable. Stay flexible from May to June. My comments in the cattle section in regard to protecting feed supply also apply to hog producers.
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Utterback Marketing Services, Inc., and is, or is in the nature of, a solicitation. This material is not a research report prepared by Bob Utterback/Utterback Marketing Services, Inc. By accepting this communication, 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. Distribution in some jurisdictions may be prohibited or restricted by law. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibition or restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction without registration, the market commentary in this communication should not be considered a solicitation. 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 or strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Utterback Marketing Services, Inc., believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice given will result in profitable trades.
- January 2013