Put Your "Risk Manager" Hat On
Apr 09, 2012
Corn continues to have many unanswered questions, and I believe this theme will continue for sometime. With new crop bushels currently trading below insurance levels and a good portion of our estimated production either priced or hedged well above $6.25 I believe the best decision right now is to do nothing at all. Below are few question I would like to see some additional data on before we make any major "risk management" type decisions or adjustments to our 2012/13 marketing. Keep in mind prices right now reflect a lot of "opinion" and very limited "facts."
- More Corn Acres: Will corn acres move higher like Informa believes (96 or maybe even 97 million acres)? If history is correct, and "early planting" brings on more corn acres then we could be in for a monstrous crop.
- Fewer Corn Acres: Will corn acres move lower (maybe 93 or 94 million) as the current $14 soybean prices steal more and more acres?
- Above Trend Line Yield: Will the early planting, near perfect field conditions, big dollars that have been spent on field prep this fall and winter, improved triple-stack traits produce a national yield in excess of 164 bushels per acre?
- Below Trend Line Yield: Will the addition of several million more acres from the Dakotas and plantings in "less-than-perfect" fields drag down the national average? Will extreme winds, hail, freezes, heat waves or other weather related issues adversely affect this years crop?
- Ending Stocks: Ending stocks will be 1.8 billion plus if we have somewhat ideal growing conditions and a limited increase in demand. On the flip side a significant bump in "exports" and just a slightly below average trend-line yield and we are talking about a 1.0 to 1.2 billion carryout. In the event of a weather related issue we could see ending stock estimates change in the blink of an eye by almost 1 billion bushels. There are just so many unknowns right now.
- Chinese Demand: Who knows what is behind this "smoking gun." I don't even want to begin to speculate, but with $10 corn in China I have to believe there is something obviously wrong. My hunch is they are extremely short "supply" and without a perfect growing season this year they will need to be big buyers of corn regardless of price.
- Feed Usage: Once again a highly debatable subject, but my thoughts are with "limited" expansion in the cattle herd there is really not much significant room for major demand type increases. Sure we could see 100 million added here or there, but I am not holding my breath.
- Ethanol Usage: Here is another real "wild card" with so many moving parts, especially now that E-15 is being thrown in the mix. Originally thoughts we that a 2.7 conversion rate should be bumped up to 2.8 or higher, which ultimately would reduce the number of bushels used to produce ethanol. Now we have the EPA approving E-15 and fuel prices continuing to be the topic of extremely heated political debates and voter frustration. How quickly will E-15 get into the marketplace is a big question? How big will consumer demand be? Will Brazil import as much ethanol as last year? Will Argentine look to import US ethanol?
Soybeans continue to see strong cash bids as well. The export market is carrying the trade right now as everyone speculates on massive US exports from June forward in order to compensate for the heavy South American losses. Obviously tomorrow's numbers will have a huge impact on US soy balance sheets. In fact there are several respected sources who believe the USDA is currently 100 million too high when estimating THIS years ending stocks. Instead of a 275 ending stocks number some are talking about a 175 million ending stocks number. The key questions are how high will the USDA bump "old crop" soy exports and how much higher will they push the crush? Right now the USDA has soybean exports estimated at 1.275 billion, there is some talk that we could see a push beyond 1.30 billion in tomorrows report. There is also some talk circulating that the current "crush" estimate of 1.615 billion could push up towards 1.65 billion. Any or all of these combinations would be bullish the soybean market.
Soybean producers should NOT be waiting around to price 2012 bushels. The time to reduce some of your risk is now. I strongly urge you to get at least 50% locked in. Yes, I think prices can go higher, but just remember we are not speculators, but rather "risk managers." With the funds holding all-time long positions in soybeans and extremely volatile "outside" markets this is not the time or place to gamble with your entire crop. Make some substantial sales and lock in your profits. I am also looking very hard at making some small 2013 hedges as well, and I would suggest you do the same. Yes, the market is concerned about the current production problems in South America, but as the US starts to find more bean acres and South American producers lock in prices for more acres next year the trade will quickly start talking about an extra 30-40 million more tons of beans being produced. I am telling you now a 275-280 world crop number for 2013 will NOT equate to $14 or $15 soybeans, so make sure you are taking some advantage of the run higher and reducing some risk on down the road.