Bob Utterback: The Beast We Call "The Markets"

April 22, 2017 01:58 AM
wheat field

It’s been my honor to offer guidance on how to manage risk for your farm operation for 23 years as a part of Farm Journal. This column marks my last regular appearance, though I’ll still chime in on “U.S. Farm Report” and in Farm Journal from time to time as well as at farm shows. I’ll still work with farmers on an individual basis too. 

As we work through one final look at crop commodity markets, my goal remains to help farmers position themselves to sell their production or expected production to net the best return on investment with the least risk possible. 

Corn. It appears South America’s crop is getting bigger and their inventory is undersold like a large part of U.S. farmers’ 2016 crop. Producers stand firm in their conviction that something will force corn prices up to bail them out. While I don’t disagree, the clock is ticking. If the 2017 corn crop gets planted quickly, there’s only one option that can lift the markets—a significant weather event. Many weather forecasters suggest this weather pattern won’t happen in the major corn production areas. In fact, the weather might be conducive to average or above-average yields. 

This places producers in a dangerous situation. I still suggest December corn must be sold above $3.95. If that price point occurs between April and June, buy deep-in-the-money December puts rather than short futures or cash positions. This will put a floor under the market but still provide upside price potential if a weather event does occur. Lock up all fall basis bids against hedge-to-arrive cash sales that must be sold at harvest by the June supply and demand report. Again, from mid-May to mid-June, sell rallies, don’t buy breaks. 

Soybeans. South America’s soybean crop has recovered and improved enough to add bearishness to the soybean complex. U.S. farmers have sold most of their 2016 inventory, which helps balance the market. The real story for soybeans lies in what’s ahead. 

This past winter, the November soybean contract was above $10, providing an opportunity to lock in a modest profit that didn’t exist with December 2017 corn. This has increased interest in soybean acres. I still believe soybean acres will be above 88 million. The main force in soybeans is growing Asian demand, while the big bearish factor is increased acres in the U.S. and South America.  

Trade is looking at April to July weather patterns and positioning for a seasonal rally, but I believe current fundamentals will diffuse this rally. Focus on selling rallies (November contract between $9.95 and $10.30) to get all expected 2017 production sold. Refrain from aggressive naked (or short) call selling until late July or early August. If lacking in calls, move to the sidelines if November soybeans close above $10.35. 

Wheat. Wheat prices should be close to a low domestically because of reduced acres. While the market has come to terms with this, it looks like it’s on track to test contract lows. 

At times like this, the alternatives are limited because many producers dump inventory at harvest. Wait until after harvest to price production. When inventory is sold in the cash market, buy the seasonal lows in August or September using deep-in-the-money December calls and hope the bear runs out of steam and needs to rest in the fall and winter. The problem for wheat will be the overall bearishness in the grain complexes. Wheat prices should turn before corn; but how long do we have to wait? 

Again, thanks for allowing me to be a part of your operation through the pages of Farm Journal. My door is always open.  

Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions. 

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