Hang on for 2009

January 10, 2009 08:24 AM


Bob Utterback

Well, 2008 gave us a wild ride. Now your focus must be on making a profit to stay in business in 2009. As we start the year, producers can still sell $4 cash corn or $8 beans. Granted, that's nowhere near what we were offered in 2008, but a lot has changed. It's my judgment these values are about as good as you are going to get unless you want to bet on the weather.

Remember, money tends to flow freely to the business where one can get the biggest bang for the buck. Right now the cotton market is barely above variable costs of production; new-crop wheat prices are a little better but still not covering all costs. The corn and bean markets are the best off right now except for some specialty crops. This suggests to me that acres will flow into corn and beans. The question: Will farmers plant beans because of reduced cash flow requirements, or will they plant corn because they have higher odds of getting bigger yields? Let the debate start!

Chickens, hogs and cattle had red ink in 2008. The chicken industry has acted fastest. The initial numbers for first half 2009 suggest a necessary reduction in production and a subsequent reduction in soymeal usage. As for the hog industry, the story line continues to be some contraction but not enough to really tighten supplies.

The big concern I have for hogs and cattle is the fact that we have become very dependent upon exports to keep prices strong. In the current economic environment, exports could be the real tragedy for meats.

I hope we can hold the $50 level in hogs and $75 in cattle. It will depend upon the global economic situation not getting any worse. While a worse situation could be factored in by early 2009, the big question is how fast we can bounce back. Right now, I believe many want to argue a fast recovery, but I fear it could be slower than we all really want to hear about.

Sales Index Key
Excellent sales opportunity 10
Excellent buying opportunity 1

Old Crop 8
New Crop 8

The December price bounce gave producers who needed first half 2009 cash-flow sales an unexpected price recovery to move product. Anything above $3.80 to $4 in March corn is about as good as it's going to get.

For new-crop corn, $4.30 to $4.50 is about the best we can expect into spring. Any hope of $5 corn will depend on (1) the crude oil market stabilizing and rallying back and (2) the occurrence of a spring or summer weather event.

Bottom line: Start getting cash sales on the books at $4 cash and increase your percent sold based upon the time of year.

Old Crop 4
New Crop 8

The bean market has a split personality right now. It's got the near-term bullishness of moderately tight stocks at 205 million bushels and potential weather problems in South America. At the same time, China and India want to build stocks. This should help keep prices firm and even friendly.

The long-term picture looks bleak. Tight cash flow and new-crop prices above $8 are going to attract acres. The unknown factor is how many. I would not be surprised to see a low $6 in cash beans with a wide basis this fall. If the global slowdown continues and crude oil is below $40 a barrel, we could go even lower. The only way we will see higher prices is if a weather event occurs.

Again, 2009 is not a year to be taking big risk. Take the sure thing, and get a large portion of your inventory sold in the cash market. If you want to defend with calls later, consider such a strategy in May or June.

Wheat 6

Near-term prices are at levels where it's difficult to be bearish. The problem is global supplies are increasing, and unless we have a domestic weather problem, an upside price rally is limited. Price pressure on spring wheat producers may drive them to other crops, but an overall building of global supplies is going to keep wheat in check. Another implication of good supplies is it will keep price pressure on corn because of the comparative advantage of feeding wheat instead of corn at these prices.

To add value to next year's crop, consider selling out-of-money calls at levels where you would like to sell. Example: Let's say you want to sell $7.50 July wheat; right now, the market will pay 20¢ for that right. Not a great amount of money, but it's better than doing nothing.

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/her own risk. Consult your Risk Disclosure Statement before trading. To comment on Outlook, e-mail Outlook@farmjournal.com. 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 bob@utterbackmarketing.com. You can read daily comments from Utterback after markets close at www.FarmJournal.com.


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