Opportunity to Lock in Profits for Producers

October 31, 2012 04:35 PM

Producers have opportunity to lock in profits early in 2013

Three events that occurred in 2012 are giving one economist heartburn. "Last year, I suggested three primary game changers in the mix: the looming global economic slowdown; political reaction to global deflation; and any unexpected yield reduction event," says Bob Utterback, Farm Journal economist.

Not one, but all three events took place in 2012. "The European situation continued to worsen through most of 2012, and I am concerned we could see continued weakness in the first part of 2013," Utterback says. "This could be pulling down China’s economy, as well as ours."

"Keep prices strong enough
to encourage producers to
rebuild stocks, but not high
enough to kill demand."

Deflationary pressure concerns have forced the U.S. Fed and other global banks into historically
unprecedented monetary stimulation, dropping long-term rates to stimulate the global economy.

Utterback says this is more or less the Fed’s last move. "From here on, it must be fiscal policy," he says. "We can only hope that Washington, along with European politicians, will start  implementing policy that will get everyone back on a path of true economic growth."

In light of this fiscal mess, Utterback says one would have thought the Oct. 11 supply and demand
report would be bearish to the ag complex because demand strength is a major component of the supply and demand equation. However, two things happened.

"I sense most governments are working hard to keep food prices low in order to keep consumers relatively happy," Utterback notes. "There is an old saying that a well fed population is a tranquil population. However, the big bullish offset this year has been the drought."

Bottom Line Means Balance. Utterback says this means the function of the market in 2013 will be to keep prices strong enough to encourage producers to rebuild stocks, but not high enough to kill demand. As a result, he says, many producers are very bullish due to the supply event and are inclined to store high-priced production all the way to next summer, even though the market has no carry incentive.

"Corn and soybean prices, even after a very sharp drop off the August highs, are still posting some of the highest levels seen at this time of year," Utterback says. "At the same time, overall production costs have not risen as fast as grain prices yet, which builds in a tremendous ability
to lock up great profits early in 2013."

The only problem Utterback sees with this is the deferred contracts. Corn below $7 and $13.50 soybeans will seem too low to producers when compared to the current flat price potential of new highs if a weather situation develops in South America or the U.S., he explains.

As always, the economists encourage producers to develop a plan of attack, implement the plan and make adjustments based on knowledge, not fear, to improve the producer’s bottom line.

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