Outlook: Anticipated Yields Pressure Markets

March 4, 2017 02:39 AM

Even in the new age of big data, several questions about the 2017 crop linger—and we’re going to have to wait for the answers.

I’m comfortable assuming corn acres will be down, but by how many is the question. My guess is it’s north of 1.5 million, but south of 4 million. It all depends on spring weather—if planting conditions are great the corn planters will be hard to stop. In addition, we know a lot of wheat ground didn’t get planted. Will it end up in soybeans? Finally, how do producers’ cash flow situations look this year? Soybeans take a lot less money to plant, and at current values, they ensure a profit while corn producers still need an event to break even. For now, I expect corn acres will be down slightly and soybean acres up significantly.

The May-to-July period for grains and oilseeds prices is historically volatile. Inventories are clearing out and weather becomes the overriding influence on prices. 

While weather models are really good at predicting near-term weather conditions, there’s significant variance in long-term (more than a month out) forecasts. This creates a lot of problems for producers—by the time we’re sure about crop development, good pricing opportunities are gone. This year will be even more problematic because we’re starting with adequate corn stocks. If soybean acres are confirmed with trend line yields, future carryover stocks could explode and push prices below the cost of production. 

While I expect somebody in the Corn Belt will experience yield stress, assume higher-than-trendline yields for selling but have a game plan to defend if bad weather comes. Remember, marketing plans made during the calm of winter are extremely difficult to implement during the excitement of summer, unless a solid upside and downside strategy is laid out with specific time and price targets.

Soybeans. The market has hit price targets for November 2017 soybeans. All cash bushels covered by crop insurance should be sold at $10.30 or better. Sell additional bushels via a deep-in-the-money November 2017 put, with a time value cost of 30¢ or less. Place open orders to roll up 20¢ in strike price when it can be done for 8¢ or less. Convert puts to cash sales before the August supply and demand report.

Corn. The target selling price of $4.05 to $4.30 basis the December 2017 corn has not been achieved. When it is, buy deep-in-the-money December 2017 puts with a time value cost of less than 15¢. Roll up puts every 10¢ when a modest 4¢ premium can be achieved. Plan to store all corn on the farm and convert puts to forward cash sales after the August report.

Wheat. Farmers continue to struggle under the burden of large global supplies and tight domestic production. A positive attitude suggests taking more risk in a slow forward-selling strategy. This is especially true for spring wheat farmers if lower acreage is confirmed. Make only cash-flow necessary sales until early May.

Cattle. Get ready for the spring high and slow grind lower into late summer and fall. Lower feed costs will pressure the market to keep feeder prices strong. Another bullish wild card is if the inventory coming from Mexico slows down. 

Hogs. The hog market scares me a little. We’ve seen a lot of price strength. I’m skeptical about the market having the horsepower to drive prices higher into summer, though. Exercise caution and place floors at breakeven via a put strategy. 

Any opinions expressed herein are subject to change without notice. There is a significant risk of loss in trading futures and options, and trading might not be suitable for all investors. Those acting on this information are responsible for their actions. 

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