2014 Planning Guide: They Say It’s a Bear Market

November 12, 2013 08:07 PM
2014 Planning Guide: They Say It’s a Bear Market

Positive margins are still possible from just-harvested crops, but it takes skill

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Farmers should not waste their time searching for a quick fix to the brave new world of corn and soybean markets, but there is still money to be pocketed by those quick on their feet. While experts differ widely on price forecasts and marketing strategies, the 15 analysts on the following pages agree that margins will be far tighter in 2014 than in recent years. Keep the following tips from advisers as reference points as you work to understand and implement new sales strategies for the upcoming year.


As we adjust to increasing stocks and weaker prices, markets are in transition. Lower prices will discourage global production and encourage use. The one event that could alter this would be poor growing conditions in South America. The new year holds the potential for two market surprises:

1) Chinese imports and production and 2) changes to the ethanol mandate, which would be bearish for corn.

One alternative to consider is an option-based risk-management strategy. There’s a lot of downside potential in the market; however, supply and demand surprises could change that quickly. Farmers can use an option-based program to establish a price floor for inventory in storage or expected production but leave the upside open. Another strategy is to make cash sales if basis is favorable and purchase call options.

jeff beal

The last time U.S. farmers looked at a 2 billion bushel carry-out was 2004/05. It’s possible that the 2013/14 carry-out will get close to that. Unlike nine years ago when the stocks-to-use ratio was 20%, today’s ratio is 14.5%. This means we won’t see $2 corn again. Still, prices will remain under pressure.

For just-harvested corn, farmers should focus on selling for the carry and padding their income by selling call options.

Soybeans also face lower price pressure, but demand from China might continue to provide price support, at least in the near term. The inverted soybean market says farmers should sell now.

Without an unforeseen demand catalyst, we’ll have to rely on a weather-induced supply shock somewhere to get back to $6 corn and $15 soybeans.


Corn markets continue to respond to large ending stocks. U.S. soybean stocks are not as burdensome, but world supplies are at record levels.

With the expectation of a less friendly U.S. monetary policy, funds have left or are reducing commodity holdings. In this type of environment, funds choose to exit highly inflated commodities, which provides global buyers an incentive to bid low as they know corn farmers must eventually sell for cash flow. Barring a major weather event, prices should bottom out at sub-$4 per bushel corn and sub-$11 soybeans. There are many tools, such as an option box, option three-way or covered hedge/sale, that are relatively safe. They allow you to establish a floor while keeping the upside open.


Global ending stocks for corn are the highest in 10 years, and this keeps prices on the defensive, allowing futures to test $4 per bushel. When we’re in a doom and gloom scenario, typically fundamental news emerges and turns the market around.

Corn futures charts show a gap around $6 per bushel that might get attention in the coming months, but there’s no news to justify such a price move yet. We’ll continue to wait for unexpected events, such as weather, China or friendly USDA reports, to spur prices higher. However, at this time, farmers should view any rally as a selling opportunity.

Domestic soybean demand will keep prices firm for the near term with the market signaling to sell. If news develops to warrant prices of $13 per bushel or more, move to re-own. Deferred contracts will likely stay on the defensive, given the prospects for a record South American crop. Spring and summer futures contracts seem likely to test $12 support levels; thus, prices are likely to trade sideways to lower unless a South American weather scare occurs.

Prepare for both bullish and bearish scenarios. Make incremental sales as prices go to the high end of ranges. If prices break through technical resistance, plan to re-own the crop. Finally, establish price levels for making cash sales.


Commodity prices are cyclical, and the current downside price cycle is not yet complete. It will likely run through January. Once a bottom is discovered, both corn and soybeans will enter a base-building phase that could take anywhere from a few months to three years to achieve.

For corn, we have been heavily priced in short futures for months and will be looking to take profits soon. To price remaining corn, we will look for basis improvements between now and March. Soybeans will feel negative price pressure from sharp production increases in South America.

What are potential surprises? Low corn prices will likely bring a sharp increase in exports. Ethanol production could also jump more than anticipated, due to exports. This will help in the base-building phase for both corn and soybeans.


Huge ending stocks for corn will cap rallies, but most producers are well financed and can wait for those rallies.

Feed usage will exceed 2013 levels because the wheat-to-corn ratio has choked off wheat feeding and livestock margins are positive.

The U.S. soybean stocks-to-use ratio is tight, but might loosen with better-than-expected yields. With the forecast of a record global stocks-to-use ratio, we could see soybean prices drop to the sub-$12 per bushel range. The black swan event I fear most is the attempt to limit the use of biofuels.

When price targets are hit, farmers should scale up sales. Options spreads and cash market equivalents are probably the sanest way to ride out market volatility. There will be decent returns to on-farm corn storage, but you have to set a price to earn the carry. Simultaneous gains in both basis and price are rare, making cash-grain-only marketing difficult to do well.


Since 1983 corn has not made lows in October, and it is more likely to make the lows in November or December. The government shutdown delayed USDA’s crop production estimates and opened the door for a bearish report.

One saving grace might be strong demand from China. I suggest selling the bushels above your average production history and maintaining corn put options for any unsold grain. If you are trying to capture the carry, you must sell the deferred contract to lock it in.

With soybean yields well above expectations, production and carry-outs will be higher than anyone thought on Sept. 1. Chinese demand for soybeans remains strong, but USDA has already budgeted in huge Chinese exports.

My fear is that once the market has a better feel for big yields, funds will liquidate long positions. With no carry in the market, farmers should sell soybeans at harvest and re-own the crop with call options when technical indicators turn friendly.


Prices in 2014 will trend higher. It’s hard to know what fundamental factors will lead to increased prices, but price cycles point to an increase in soybeans, which will also help corn.

I don’t see $3 corn and $7 soybeans because of today’s higher production costs. For price targets, look for beans between $16 to $16.50 and corn between $5.25 to $5.75.

Nearly everyone has a perfect crop coming out of South America, so any little hiccup there could become very bullish. Don’t forget about what’s going on in Washington. If the world loses faith in the dollar, watch what happens to commodity prices.


The buildup of corn stocks means the market must work to rebuild demand. Lower prices will improve demand, but it’s going to take time. Soybean stocks are set to rise marginally through 2013/14. Unlike corn, soybeans don’t have to worry about demand. China’s robust appetite for U.S. beans limits downside risk barring a global macro-economic meltdown.

Ethanol demand holds the potential to surprise. The corn-based ethanol mandate is expected to be reduced for 2014. However, a lower mandate would only reduce the usage floor, not the ceiling. If conditions warrant, blenders will blend above the mandate. A greater corn supply and lower prices might lead to more corn-for-ethanol grind than anticipated.

Because of the lower corn price outlook, even short-term rallies should be viewed as selling opportunities. The price structure for soybeans suggests selling now. Focus on managing risk with long futures and call options.


In order to prevent a 2.5 billion bushel carry-out, the price of corn needs to drop to boost demand. Additionally, crop insurance has incentivized growers to hold off on marketing their crop. This has created a record amount of unpriced grain, but the market will keep prices on the defensive.  

Cash corn will likely hit $3.50 in the first half of 2014, barring major weather or geopolitical concerns. The biggest mistake growers can make is to store grain without price protection. One way to protect yourself is to be 100% sold and re-own grain with call options.

Soybean yield improvements have not yet been reflected in futures. Dry August conditions drove prices higher, sending a signal for South American growers to plant more soybeans. A normal growing season there will put soybean prices near $10 per bushel this summer.  All soybeans should be sold at harvest and some re-owned with calls.


The canceling of USDA’s October Crop Production report that was anticipated to be bearish helped stabilize corn and soybean prices, but that won’t last long. Beyond harvest, corn and soybean prices will be pressured. Corn has been
 trading close to major support due to strong yields and poor demand, but it might be near its bottom. Farmers should look at selling the carry and lock in basis levels when they become attractive. If a post-harvest rally materializes, consider setting a floor with put options.

Importers continue to buy soybeans on price breaks, and Chinese demand remains strong. This has helped soybeans remain close to $13, but they are about $1.50 overpriced, so producers should be selling now. Traders seem to be waiting to see USDA’s Crop Production estimates before factoring in higher production. To retain ownership, buy July calls.


While yields are better than forecast for this year’s crops, the trade is dialing in on actual production. We are expecting soybean carry-out at 180 million to 200 million bushels and corn carry-out at 1.855 billion to 2.2 billion bushels. However, we should never underestimate China’s ability to buy corn, soybeans and other crops. This could be one of the surprises for 2014.

Buyers are starting to show concern about the need to have food reserves after watching the unrest in the Middle East and northern Africa. We could see importers switch from "just-in-time" purchases to reserves. Add to this Brazil’s inability to make timely export shipments, and demand stays with the U.S. in the new marketing year. Currently, we are heavily front-end loaded with soybean exports.

I peg a 75% chance of seeing a higher high in corn and soybeans in 2014 and a 25% chance of lower lows compared to this year. Unlike 2012/13, using futures in the year ahead will likely provide producers higher margins compared to cash sales.


Producers are heavily exposed with less grain forward sold and will rely on access to storage and strong working capital to carry them. Come late winter/early spring, producers will need cash, adding pressure to the market. Don’t get caught in this trap. Storage should only be used on bushels forward sold. Capture the carry and move on. Buyers will have little motivation to chase markets. Corn in 2014 should be sold on coming rallies, with put options used on unsold bushels. This combines downside protection with upside opportunity.

The plot has thickened for soybeans with a slow start to South American planting and tight domestic balance sheets. The story’s climax will occur once a firm grasp of the South American crop is firmly quantifiable. Adding more beans to the world supply will take away premiums, but a short crop in South America will present pricing opportunities. With more soybeans to be planted by U.S. producers, planting season only adds greater price risk.


Will we see $8 corn and $16 soybeans next year? If production drops below expectations and demand explodes with significant interest in building long-term strategic reserves by end users, it’s possible. However, I think there’s a greater chance of seeing pigs fly around the Chicago Board of Trade than seeing those prices in the next year. Washington would also have to get its act together.

Production costs are set to remain high for all of 2014. Unless Mother Nature causes a drought in a major global production area, I expect prices next fall well below break-even.

My solution calls for a strategy of selling the carry in the market and managing spreads. Farmers should consider selling out-of-the-money puts to raise the net selling price and roll short futures into long puts next spring if there are any solid signs of a major yield reduction event. I would rather try this approach than take out loans, put your money in the ground, raise and store the crops and hope to get back to profitability by the spring of 2015.


Corn could make a short-term bounce to the upside following harvest as farmers lock away bushels. With U.S. export prices getting more competitive and ethanol demand remaining strong, prices could be bid up near term. However, as we move into early 2014, corn could once again fall under more pressure.

With the harvest of a new record corn crop and prospects of another massive crop behind it, USDA’s Agricultural Outlook Forum in February could paint one of the most bearish price pictures we’ve seen in years. On the bright side, falling corn prices means less corn will be planted in South America and the U.S. It will take another year of production problems along with an acreage reduction to get prices above $5.50 in 2014.

On soybeans, Brazil essentially sold out of supplies early, and Argentine producers have a death grip on remaining supplies. With large lines at U.S. ports, exporters will continue to be forced to bid aggressively for supplies. U.S. crushers are also bidding for bushels, essentially providing price support until South America’s record production can be confirmed.

If producers follow suit and aggressively plant more soybean acres, prices could hit longer-term pressure. If weather cooperates in South America and in the U.S., we might see global supplies quickly overwhelm demand. By mid-2014, the downside could be more extreme than many forecast.

Go online to get in-depth analysis and the analysts’ full perspective. Visit www.TopProducer-Online.com/MarketOutlook.

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Spell Check

12/4/2013 11:44 AM

  Hey Mr. Mike Florez - tell us what you know that the rest of the Industry analysts obviously doesn't. You are the alone bull among a sloth of bears...


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