Market Strategy

March 6, 2009 12:27 AM

Hope for the Best, Plan for the Worst

USDA's grain stocks and prospective plantings reports at the end of this month will give us the first survey-based look at whether or not there will be a significant shift in our acreage mix and, more importantly, whether the market will care.

The fear is that demand is even softer than expected. A lot of questions will be answered by USDA's March 31 reports, and we may not like the answers. The measure of success this year may not be how much we make, but how little we lose.

Corn faces a reduction in ethanol production and weak livestock demand.

Beans are priced at an inverse—worth less in the future than now, supported by exceptional Chinese buying and possible lost South American production. The market is screaming, Sell me the beans now! That may not last.

How will USDA's reports envision demand going forward? Will other importing nations take up the slack, or will South America accelerate sales, taking its cue from the inverted market?

Less cash required. Producers are telling me they can plant soybeans at $150/acre less than corn, requiring that much less to borrow and providing more funds to manage risk. Beans also reduce the extra risk management capital so many were lacking in last year's volatile markets, which forced some ethanol plants out of business—not to mention the large commercial buyers who took a sabbatical from buying when things got tough.

It now takes more than just working capital to produce a profitable crop; it takes "hedge" capital to manage the price risk successfully. This year, the nickels and dimes saved will go a long way toward paying for on-farm storage, which will prove to be a major profit generator again this year.

What to do? Be prepared for a demand-induced price shock on March 31. The May at-the-money put options for corn/beans/wheat will provide downside protection from the reports until the market gets excited about a too-wet spring.

If there is a danger, it is that corn demand will fall further. Yet corn could still find problems with fertilizer supplies and a wet spring.

Put options will allow you to determine what part of the crop you want protected. I'll do at least a 20% minimum, reflecting bushels not necessarily covered by my crop revenue insurance.

I don't know just how low prices could go, but what I think I do know is that there is no use in the current economic environment for $5 corn, $11 soybeans or $8 wheat. If reduced acres, late planting or summer drought send prices to those levels, it would curb world demand even further, requiring still lower prices next fall and into 2010 and making carrying the crop over to summer of 2010 look appealing. The 2011 crop year is too far off to speculate—perhaps the world economy will be repaired by then?

Bottom line. The past two years gave us opportunities to get our economic house in order so we can weather the economic storm we are in, which will surely affect us. Fortunately, we are in a sector of our economy in which profit isn't a dream or a bad word. Preservation of capital, return on investment and debt retirement have never been more important. My conservative (Great Depression–raised) parents said it well: "Hope for the best, plan for the worst."

Jerry Gulke farms in northern Illinois and North Dakota and has a consulting office at the Chicago Board of Trade. Contact Jerry at or (312) 896-2080.

Top Producer, March 2009

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