Market Outlook, December 2010

December 1, 2010 06:10 AM

Advisers Launch 2011 Sales

Prior to the October price spike, only a few marketing advisers had priced half or more of the corn and soybean crops. The values of hedged-to-arrive contracts, hedges and options positions, as well as cash sales, are reflected in the Market Value columns below. For the breakout of cash, futures and options, click the Marketing tab above.

The prospects are for price to continue to improve in the corn sector, says Dan Manternach of Doane’s Agricultural Report. “When USDA lowers the [corn] yield in October, there is a strong tendency for them to cut the national yield an additional bushel or two in November. We expect to add to 2010 crop sales and begin pricing the 2011 crop,” he says.

For soybeans, USDA reduced crush numbers, making exports the story for that crop. The October report placed exports at 1.52 billion bushels, breaking the previous record of 1.498 billion bushels for the 2009 crop.

“We have advised pricing the first 10% of 2011 production when November futures top $10.50,” Manternach says.

Key Market Factors
> Use rationing as required
> More acres of everything needed in 2011
> Exports rely on cheap dollar
> Focus on profits

Click here for Adviser Track Record Table

More Droughts

The percentage of the world’s land subject to serious drought has more than doubled since the 1970s. That will dramatically worsen in the next 20 years, according to a study by Aiguo Dai of the National Center for Atmospheric Research. “Most of the western two-thirds of the U.S. will be significantly drier by the 2030s,” he says. The world can ill afford such a development as food demand grows.

Sales Strategies for 2010 Corn

Whether you are sold out of 2010 at lower levels or have inventory in the bin, Bill Biedermann of Allendale has suggestions for you. For growers who sold a lot at $4.40 to $5.40, he recommends a strategy that will keep you in the game until the acreage battle is resolved: “Buy a March $6 call, sell a $7.20 call and sell a $5.50 put for a cost of about 3¢. It has potential for up to a $1.20 profit on a rally from $6 to $7.20 at expiration less 3¢ cost. Ownership risk is 100% below $5.50 [a 40¢ sell-off would lead to owning futures at $5.50]. In that case, margin calls might have to be met if prices continue declining.” Allendale sees major support at $5.30 until spring and a corn market objective of $6.25 to $6.50.

Biedermann is cautious, however: “I am concerned because everyone is so bullish. Funds will probably sell between $6 and $7 because there are cheaper things they can go after for an inflation trade.”

Those with grain in the bin might scale up sell cash from $5.90 to $6.45, keeping the basis open (hedged to arrive) or use futures, he says. Interest already is improving in many areas and with tight stocks, it should improve another 30¢.

“Margin interest cost is easy to figure,” Biedermann explains. “Let’s say you sell and the market rallies $1 per bushel. It feels bad, but actual interest cost on a 5,000-bu. contract for a $1 move against you at 7% is $350 per year. You will only have a hedge on for four to six months, and there will not be $1 against you for the entire time. So at most, your interest cost might be $175 or about 3¢.”

Low Interest Rates and Weak Dollar Continue
The November move by Federal Reserve Chair Ben Bernanke to keep interest rates where they were while buying an additional $600 billion of Treasuries through June should benefit agriculture.

The infusion of dollars could boost inflation, which is a goal of the Fed.

“The definition of inflation is more dollars chasing fewer goods, and this strategy in theory will do that,” says Dan Basse of AgResource. “That prospect will drive more speculative money into commodities, he adds. “This bodes bullish for all commodities.”

At the same time, putting more dollars into circulation means the dollar is cheaper. Since August,
the dollar index has dropped 7%. That’s good news for U.S. ag exports since it makes our products cheaper to those buying in other currencies. On the flip side, it makes imports, such as fertilizer, more expensive.

The announcement came as no surprise. Most analysts expected the move, which was dubbed “QE2” because it is the second round of quantitative easing. The practice is controversial, and economists and monetary policy analysts question whether it will achieve its goal of boosting employment.

However, “the Fed is out of economic arrows in their quiver,” Basse says. “By buying Treasury debt, they remove some of it from the market and, at the same time, put new money into the economy to boost monetary velocity.”

Cotton Records

Global cotton inventories are at a 14-year low, China’s inventories are at a 16-year low and, at near $1.40 per pound, New York cotton futures are at never-before-seen levels. USDA’s October report showed world demand outpacing production by 900,000 tons. Meanwhile, the International Cotton Advisory Committee expects production to outpace demand by 300,000 tons. “The market seems to be trading USDA’s numbers,” says Peter Meyer of JPMorgan Chase. Should those numbers loosen up, there could be significant downside risk.

Can the World Afford Higher Ethanol Blends?

The Environmental Protection Agency’s long-awaited decision disappointed many when it allowed E15 blends only for 2007 and later-model vehicles.

However, with U.S. corn stocks projected below 1 billion bushels, there is concern about whether an expansion would be feasible. Daniel O’Brien, Kansas State University Extension ag economist, studied the effects that 12% and 15% ethanol blends would have on corn exports and ending stocks. He assumed that each 1% increase in blending would result in 1.3 billion more gallons of ethanol produced. He also assumed distillers’ dried grains would replace corn pound for pound.

“Unless acreage increases by 10%, under an E15 ethanol production scenario we project U.S. corn exports would drop from a high of 2.02 billion bushels in 2012/13 to a low of 395 million bushels by 2015, then increase to 640 million bushels over the next six or seven years,” O’Brien says. “This is 1.46 billion bushels less per marketing year than USDA’s baseline projections.”

ExportsWouldPlummetwithE15 Unless AcreageRises

Top Producer, December 2010

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