Outlook: Set Yourself Up for Success

September 24, 2016 02:40 AM
soybean harvest2

It is harvesttime in the Corn Belt. The market has now factored in most of the supply bearishness for corn and soybeans and will be looking forward to demand. As the bin doors shut in November, I anticipate a respectable seasonal rally in both corn and soybean prices, but not back to breakeven. I expect a lot of inventory will be held for a much hoped for spring or summer weather event.

On the supply side, wheat, corn and soybeans are more than adequate as we move into 2017. If a weather event doesn’t occur in South America this winter, tremendous pressure will be put on demand to grow in order to help stabilize prices above cost of production.

Soybeans will be the leader in export sales. The pace starting out the year has been encouraging to the bulls, but I worry it’s only front-end loaded. As we look to 2017, we must be prepared for corn and soybean exports to fall off the cliff after February or March when the South American crop comes into the marketplace. Pay particular attention to the weather in South America. If things look normal, producers could enter spring with an unhealthy level of old crop in the bins, limited reduction in planted acres and price targets well above the market due to high operating costs.

Sometime between July and September 2017 we could have a real train wreck price-wise if corn, soybean and wheat yields come in close to trend line.

What can producers do?

  • The purpose of on-farm grain bins is to assist in harvesting the crop and to take advantage of seasonal narrowing of the basis and big carry. We do have big carry and reasonably wide basis. Price any unpriced crop held in the bin on a moderate rally between late November and early December.
  • Start thinking about your 2017 selling strategy. Ask yourself how you can improve on 2016 performance. Be honest with yourself. It is difficult selling supply driven weather markets in June and July. 

One strategy: Before the October USDA supply and demand report buy deep-out-of-the-money September 2017 corn calls and November 2017 soybean calls to insulate your ability to sell cash crop or futures between May and July next year. I suggest at least $4.20 or higher corn calls and $11.40 or higher soybean calls. If you understand the risk, sell deep-out-of-the-money calls and puts to reduce the cost, but have a plan to manage those pesky unknown price events that always seem to develop.

  • Buy crop insurance bushels to assure yield next spring. Once in place, you should be able to aggressively sell next spring because both of the primary risks—yield and upside price breakout potential—are covered.
  • I don’t have to tell you reducing costs is critical to your bottom line. Simply hoping to farm more acres to lower per-acre costs only goes so far. One of the toughest questions next year will be how much to pay for cash rents. Landlords will not like to read this, but it might be time to let go of high cash rent land. 

Now for the good news! If your sons or daughters are thinking about coming back to the farm, now is the time to encourage them to come home. A couple years of low prices, contraction of planted acres and reduction of inventory in the bin will set the stage for future bullish price reaction to weather events. 
Because the average age of U.S. farmers is increasing, I see tremendous opportunities for enterprising young farmers. They simply must have the grit to tough out the short-term environment for a long-term positive outlook. 

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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