Back in Recovery Mode

December 8, 2012 05:43 PM
Back in Recovery Mode

The past year will be remembered as a time of considerable supply reduction due to a historic drought that caused prices to rally to levels that effectively rationed demand. By contrast, 2013 has the potential of being the hangover after a big party where we have to deal with cleaning up the mess. I see supply on the rebound and demand fighting hard to stabilize, which implies it will be difficult to motivate producers to manage risk because of the damage done to early marketing moves in 2012.

Corn 12345678910

I expect some price strength in the corn market the first part of 2013, but it will be limited. Lock up the basis for January and February cash sales by mid-December. Try to price 75% of remaining 2012 production if the market recovers to $7.65. Midwest producers should have less than 25% of inventory stored into the summer.

Plan to sell a significant portion of expected 2013 production via a limited risk strategy of long puts or covered cash positions between $6.50 and $7 basis the 2013 September futures. It is important to sell in ways that prevent major cash flow loss if a yield reduction event occurs. I do not suggest the use of futures until June or July.

Beans 12345678910

Soybeans are at seasonal lows and the upside is limited—unless the South American crop takes a hit. The other factor to upside potential stems from resolving concerns about the domestic and global economic growth rate.

Producers with old crop soybeans in the bin will likely keep them that way until next summer in the hope of a weather event. Anything above $15.25 should be considered a victory.

As January nears, start selling 25% of expected 2013 production in increments on any limited technical recovery of the recent fall price break. Use a limited risk option strategy rather than a net short futures or outright cash sale.

Wheat 12345678910

There’s concern that the drought will continue in the western U.S., which should help push Kansas City and Chicago wheat higher. Wheat acres are up in areas of the Midwest that were dry in early 2012. With a potential of $8.50 wheat and $13 doublecrop soybeans, the double crop remains a clear winner compared with December 2013 corn at $6.

Establish a floor on a large portion of expected 2013 wheat and doublecrop soybeans. Use puts and improve the floor price if the market experiences a weather scare even in the western wheat production regions. Stay away from futures or outright cash sales until we’re past the winter injury time period next spring.

Cattle 12345678910

Fundamentally, the cattle supply is tighter than hogs because cowherds are at historic lows. Expect normal seasonal price patterns; the potential for moving higher is a real standoff. On the bull’s side, there are tight supplies, high input costs and an uncertain financial picture, which make bankers uncomfortable. The supply side will be the bulls’ playground for most of 2013.

Sticker shock is setting in, however. Consumer confidence will be hit hard in the first quarter of 2013. To keep upside potential open but only modest downside price coverage, buy out-of-the-money puts at breakeven. Don’t forward sell cash or futures unless the banker requires fullcoverage. Get feed costs locked up for spring and summer.

Hogs 12345678910

We have seen some liquidation, but not as much as anticipated. There is limited potential for higher prices from January to April, so shoot for 90¢ and call it a day. Sit tight for the May to July markets.

The biggest risk is obtaining feed supplies. Exposure on basis and flat price could be significant if we see any yield reduction in 2013. Buy defensively for spring and summer needs at current values in December 2013 corn futures. Scaledown buying below $6.05 in December 2013 will have limited risk until July.

Sales Index Key
Excellent sales opportunity...... 10
Excellent buying opportunity..... 1

The information provided is believed to be reliable. There is a risk of loss associated with trading futures and options. Anyone acting on this information is doing so at his or her own risk. Consult your Risk Disclosure Statement before trading. To comment on Outlook, e-mail For information on risks and strategies or to subscribe to Bob Utterback’s Internet site or e-mail service ($400 per year), call (765) 339-7704 or e-mail You can read daily comments from Utterback after markets close at

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