A Year to Survive Rather Than Thrive

March 28, 2009 09:11 AM

More than likely, you will be reading this month's comments on the run as you prepare for planting season. Heading to the field is a welcome relief after watching corn and bean markets retreat from summer highs to December lows.

Supply and demand. Producers tell me they are holding more inventory than normal. The reasons vary from "I thought prices were going to be higher” to "I could not forward sell because the elevator was not taking bids, so I simply won't sell until it's in the bin.” For whatever reason, producers are sitting on a large pile of old crop.

It also appears farmers have sold very little of planned 2009 corn and beans. The most common reason is their production costs are high and the current futures prices are below the break-even level. However, end users don't really care what it costs to produce a crop. Their motivation is to get inventory bought as cheaply as possible. Just because you have high costs does not mean the market has to go up; just ask the auto industry about cost versus demand!

I expect the demand side of the ledger is not going to have as many surprises as in the past few years. The global market is in a demand-contracting mode that will likely last most of 2009 and well into 2010. Consumers have been hurt; they need to rebuild their reserves. The result is that inflation will surface a lot more slowly than historical recoveries after recession. So, if we take away demand growth and inflationary concerns, the only player left is reduced supply due to weather. I have found throughout the years that trying to predict weather is like trying to catch a falling knife. Unless you're just perfect, the potential pain far outweighs the gain.

Impact of inputs.
The primary inputs that have impacted your bottom line during the past few years are energy (specifically gasoline and diesel), fertilizer and interest. The sharp drop in global demand for energy distillants has caused the supply on hand to overshadow the level of demand. This has lead to a sharp drop in crude oil prices. Crude oil producers are working hard to reduce supply and should have inventories back in line by summer. I recommend that farmers forward buy all fuel needs when crude prices fall below $40.

Looking to 2010, the possibility of more corn acres could once again increase the demand for fertilizer, making forward buying attractive.

In regard to interest rates, I have to urge in the strongest terms possible that we are at historically low interest rates and decisions need to be made now to take advantage of the eventually significant upside potential of interest rates. A short selling strategy for 10-year treasury or 30-year bonds is strongly recommended.

Survival tactics.
This is a year to simply survive, rather than try to hit home runs. I hope you have taken out crop insurance. I like revenue assurance at the 80% level. I'd be extremely aggressive in selling cash in April and May. Place stops below and an objective above for all commodities. Once cash sales are made, focus on aggressive management of upside risk by buying calls only on any technical breakout signals and equally aggressive liquidation if the trend does not follow through. This is not a year to hold your calls and allow a lot of time to pass while you wait for the right to have upside price protection.

Corn 5
The corn market experienced a solid sell-off in January and February on bearish internal fundamentals (weak demand and building carryover) as well as weak outside markets. I am concerned for producers who have large amounts of 2008 harvest unsold and, at the same time, very little sold for 2009 because costs are higher than the market price. While I don't expect producers to aggressively sell cash at the current time, it suggests a dangerous situation is developing for July 4 and later. I believe most producers are now going to hold inventory for some type of weather scare.
I strongly suggest you lock up and price old-crop basis when lead-month futures get to $3.85 to $4. The trend could be negative from mid-June to harvest with a widening basis, an increase in carry and
futures prices at lows we have not seen in some time.
In regard to new crop forward selling, my travels in the past few months suggest little pricing has been done at this time. In fact, most producers are currently upside down. Their costs are way above markets, and the objective for many is a minimum of $4.50 cash.
I hate to tell you this, but I don't believe it's in the cards for corn acres to significantly decrease this year. Along with the potential for building carryover due to weak
demand, producers could easily be waiting for a rally that simply is not going to happen this year. Producers need to be sellers starting at $4.20 basis on the December 2009 futures and be done by $4.52 or when the planters start to run, whichever occurs first. Once seed gets in the ground, it will be increasingly difficult to rally the market with a weak demand outlook.
My advice: Take out crop insurance, get a floor in place and selectively defend upside risk exposure only if overhead resistance is taken out.

Beans 9
If you think I'm bearish on corn, I'm ready to abandon ship on new-crop beans! The potential for increased acres is simply too much for the bean market in light of the global economic slowdown.

However, common sense suggests that after such a market break off this past summer's highs, one must have confirmation of acres and production before the final assault on major lows is confirmed.
I'm working on the assumption that planted bean acres will be 79 million to 80 million acres and the current tight bean stocks of 185 million bushels will eventually increase to 420 million bushels or more.

Granted, old-crop supply may keep lead months choppy until the summer months. However, in my opinion, upside potential is limited.

Here again, the problem for new crop is production costs are simply too high and current prices would result in a loss for producers. The only way producers are going to be able to get the $10 to $11 they want is by selective trading. The problem is, such action is limited to the futures and option markets, which most cash producers detest.

Market variability is still a serious risk with new-crop beans. Downside risk is increasing as carryover basis will widen during harvest pressure, and futures could easily test levels not seen for some time.
My suggestion again is simple, but rather expensive: After taking out crop insurance at the 80% level, place stops under beans at support to sell cash. Move orders up if the market rallies with the objective of being done as close to the $9 level as possible. Once short, focus on defending with a long call or futures on technical breakouts, but be aggressive in removing positions if there is no follow-through to upside.

Feed buyers should be looking for an aggressive meal-buying position between the August and September supply and demand reports. Essentially, when producers are ready to flush inventory into the market, you should move to lock up 2009 inventory needs.

Wheat 4

Wheat growers are again getting hit over the head with a baseball bat. If it was not bearish enough with the price action, new-crop basis levels are starting to widen. Farmers are already losing money at current levels; the wider basis is only going to add insult to injury. The net result will be even fewer planted acres as we move into 2010. This will eventually put a bottom in wheat and put pressure on corn and bean to absorb acres.

The best opportunity for wheat producers is to take advantage of every price bounce we see in April due to bad weather conditions and confirmation of reduced acres. I would love to tell you that we have a lot of upside price potential; the problem is, outside market influences and the perception that the global economy is slowing are going to continue to thwart the upside possibilities and will keep prices under pressure.

Be realistic—sell an oversold condition as we go into early April. End users, including feed buyers, need to develop a major buying game plan if lead-month wheat gets below the $4.80 level this July.

Cattle 2
Hogs 3
The hogs, cattle and poultry complexes have had a tough year. We have seen active inventory reduction in all sectors. Just like the oil industry, the livestock industry is desperately trying to get supply back in line with demand.

I believe we have reached equilibrium as long as we don't see much more weakness in domestic and global demand. Here are the intangible factors for the meat complexes right now: How fast will export demand stabilize and consumer interest develop?

Prices are cheap enough and the tone of the market is that everyone wants to buy meat. I would not be short futures. If you are more bearish than I am, the only way to defend downside risk from these levels is with long puts.

Please note that feed buyers need to look to August and September to get their yearly feed needs locked up on wide basis and low futures prices.

Sales Index Key
Excellent sales opportunity 10
Excellent buying opportunity 1


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