Drought Influences 2013 Decisions

October 16, 2012 02:11 AM
Drought Influences 2013 Decisions

Producers change production and marketing

To the naked eye, two of Dale Kuehl’s fields looked identical in late August—amazingly good, in  fact, for one of the worst droughts since the Dust Bowl. Upon closer inspection, though, the Pro Farmer Midwest Crop Tour scouts found that one field had nearly double the yield potential.

So how did two fields, literally side by side, end up with varying production levels? Kuehl, who farms near Atlantic, Iowa, thinks it all comes down to hybrids. The field projected to yield 202 bu. per acre was planted with a new drought-resistant hybrid. The hybrid projected to yield 122 bu. per acre, a top performer in 2011 for Kuehl with more than 200 bu. per acre, did not contain the  droughtresistant genes. Kuehl planted the drought-resistant hybrid on 15% to 20% of his acreage this spring.

Will Kuehl plant a higher percentage of drought-resistant corn in 2013? "It’s a real possibility," he says, not yet committing to next year’s seed until he sees what his yield monitor shows at  harvest.

If the drought lingers to next spring, one Nebraska producer says, he might plant all soybeans and no corn since soybeans can produce a crop with less moisture.

The drought is altering more than agronomic practices. It’s also changing producers’ marketing strategies. Normally, Kuehl sells a percentage of corn throughout the growing season. This year, he’s holding off on marketing until he sees how many bushels he ends up with, not wanting to lock in contracts for corn he can’t deliver. Once he is confident of his final yield number, he plans to be aggressive if he can sell corn for $8. "If you have $8, there’s no reason to stick it in the bin and hope for $9 or $10," Kuehl says.

With an eye on the future, Illinois producer Byron Jones says the drought has altered how he will market his 2013 corn and soybeans. In a departure from his typical sales pattern, he expects to pre-sell more than normal. He plans to forward sell 15% to 20% of both corn and soybeans by harvest, and that much again in early January.

"This is an election year and farmers are forgotten about after the election," Jones says. Moreover, going all the way back to 1970, history shows that a short crop has a long tail, and thus price peaks could occur either prior to harvest or shortly thereafter.

"This will be a hedge against lower prices," the Saybrook, Ill., producer says of his strategies.
Based on what Jones saw in fields, he believes the national yield will be lower because of small kernel size and low test weights.

The best time to market 2012 corn is when the market is trying to cut back use and destroy demand, which might be soon, if not now, says Pro Farmer editor Chip Flory. As a result, the price peak might have already been reached. "That’s not to say we won’t have another run-up to retest the highs," he adds.

Hefty Discount for 2013. As for marketing next year’s crop, the discount of December 2013 versus 2012 futures was a whopping $1.56 in August. That said, "it’s still $6.50 corn," Flory says. He sees nothing wrong with selling up to 20% of expected 2013 corn, but no more than that. He anticipates anothermarketing opportunity to occur next February and March when corn and soybeans duke it out for acres. "I just don’t see a lot of downside risk for December 2013 corn," he says.

"The best time to market 2012 corn is when the market is trying to cut back use and destroy demand,
and that might be soon."

For soybeans, Flory thinks the November 2013 contract is going to have to wake up, given its heavy discount to nearby prices. In addition, a drought is moving into Brazil and some areas have not received moisture for 120 days. "I wouldn’t sell a 2013 bean right now," Flory says.

"For [Iowa] corn overall, this year is the worst yields I’ve ever seen," says Jay Merryman, a  Marshalltown, Iowa, farmer. He expected that, even though he secretly hoped that corn plants had miraculously rebounded from the severe drought. "I’ve seen individual fields that were bad before, but never an entire state."

One lesson to learn from the drought is that once producers have a handle on their yields, not only
should they sell 2012 corn at $8 but seriously consider selling a percentage of 2013 corn, perhaps even 2014 corn, Merryman says. "We don’t want to sell everything, however. We want to get a look at the rain pattern this fall."

The corn-soybean spread is one reason Merryman continues to be bullish on corn moving forward.
The historical corn-soybean price ratio is 2.5 to 1, but presently, it’s just 2 to 1. To bring the ratio back to 2.5 to 1 means corn prices have to move lower or soybeans have to move higher, and the latter is more likely, in Flory’s view.

Tom Burrer says that while state yields are down significantly from historic averages, yield  projections for 2012 are still higher than what he had been led to believe based on hearsay and media reports. "This year is a disaster, but it’s not 2’ corn with no yields. It’s not the Dust Bowl," notes the 5,000-acre Elyria, Ohio, producer.

The drought changed how Burrer marketed his 2011 and 2012 crops this summer. "I sold both the 2011 and 60% of my expectation for the 2012 crops the same day," he says.

He plans on marketing much of the 2013 crop when he plants it, but not before then, because he wants to see how growing conditions are shaping up for next year. Because of a positive basis in Ohio, which is virtually unheard of in late summer, he sold corn for 2011 and 2012 at $8.50 and soybeans at $17. "It’s still possible for corn to hit $8.80 or $8.90, but even if it peaks at those prices, it may only last for a day. I don’t think I could possibly beat $8.50," Burrer adds.



The drought has changed how Tom
Burrer, a 5,000-acre Ohio producer, is marketing his crops. "I sold both the 2011 and 60% of my expectation for the 2012 corn crop the same  day," he says. He plans to market most of his 2013 crop when he plants it.



Dale Kuehl, a farmer near Atlantic,
Iowa, had one field with a corn yield
potential of 202 bu. per acre in
August, while the field right next
to it had the potential for only 122 bu. He thinks the variance is based on hybrids.


Jay Merryman, a farmer and trader
near Marshalltown, Iowa, expected
poor corn yields but has been surprised at the low pod counts for
soybeans. "I’ve seen individual fields
that were bad before, but never an
entire state," he says.


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