Outlook: Beware of Major Price Swings Ahead

August 26, 2011 09:54 PM

Bob UtterbackThe government’s inability to effectively manage our debt-to-revenue situation makes it difficult to know what will happen on a day-to-day basis. I’m much more comfortable projecting what to expect for the next two to five years.

People are scared and don’t know where to go with their money. I see more interest in buying land. Until interest rates take off like they did during Jimmy Carter’s administration, land prices will go up, which means cash rents will increase as well.

In the near future, food prices will become a major political issue. In 2012, we’ll likely see a major attitude shift toward government policy. There is no love in Washington for ethanol subsidies; they will expire. While I do expect crop insurance programs to be spared, most other programs will be trimmed back. Most grain operations will be on their own when it comes to protecting profit margins.

Producers are going to have to be even more sensitive to controlling input costs. Fertilizer costs, cash rents, and seed and machinery costs, as I mentioned earlier, are going to go up. When supply is stimulated on a global basis and demand is rationed, a dangerous situation is set up for 2013 and beyond.

Livestock producers are entering an interesting time period as well. I’m hearing rumors that cattle and hog producers are making money paying more than $8 for cash corn. Not many producers are going to throw in the towel this fall, even if the higher corn values continue into 2012.

This implies that near-term (October and November) cattle and hog prices could be under price pressure. The good news long-term: As breeding herds are contracted, we should see attractive prices for late 2012 and early 2013. The only long-term drag on livestock prices is consumer resistance to pay higher prices.

Sales Index Key

Excellent selling opportunity: 10

Excellent buying opportunity: 1

More than ever, producers must decide what they want from the market and have a plan for accomplishing those objectives. Make sure there is enough financing to handle the price swings. Finally, work with an adviser who puts your interests above the level of activity he can generate from your operation.


Sales index: 3

Those with short positions must have a plan to defend against cash flow exposure. Buy long puts rather than short futures. If the market trades above $7.22 basis the December 2012 corn, we could easily move into a panic phase for corn that would move us into a demand destruction event. This is the absolute worst thing that could happen long-term to corn producers as our lawmakers start working on a farm program next year.

Anyone who has unsold 2011 inventory should sit on it until December 2011 to February 2012. Those who are short December corn in cash or futures transactions and are looking to store until next summer should consider rolling hedges forward to capture the limited carry that exists. The risk is high for December corn to go premium to the deferred contracts as we move into early winter.

Anticipated 2012 and 2013 production will be difficult to price because the highs will come before the seed is planted. After experiencing two dry weather events, it will be hard for producers to forward sell their 2012 and 2013 crops. Buy deep-out-of-the-money December 2012 calls soon to help ease the pain of selling early. Develop a plan now on how to approach selling multiple-year crops if a price event occurs this winter.


Sales index: 5

Soybeans have been trading between $14.10 and $12.85 for some time. A close above or below this range could trigger aggressive stop loss orders to be filled and new market positions.

For those who have sold all expected 2011 crop off the combine: If November soybeans close above $14.10, be prepared to implement a short-term call strategy to protect against upside price risk. What would cause this? Rain can have a big impact on final soybean yields. Essentially, a 2-bu. swing in USDA yield could have a tremendous impact. We could be moving toward 41.5-bu. average yield, which, unless demand is quickly rationed, could take carryover below 30 million bushels, indicating the pipeline is empty.

Bottom line: Feed buyers should get 100% of expected 2012 meal needs locked up now. End users who buy specialty soybeans are not only going to have the risk of soybean prices taking off due to lower yields, but long-term prices are expected to firm up because of lower planted acres as corn attracts acres. End users need to concentrate on buying soybeans between $13.25 and $12.50.

As for sellers, stick with my strategy of selling off the combine, but watch for a technical breakout with some measure of upside price potential in the form of long calls. In regard to selling expected 2012 production, drag your feet to see if we have higher soybean prices this winter.


Sales index: 6

The wheat lows have been confirmed, but I expect winter wheat to remain strong as long as corn and beans experience stronger prices. That’s the short-term problem; long-term, I like what I see regarding wheat. In most parts of the country, wheat can hold its own in a wheat/soybean double crop situation. Texas and Kansas producers probably won’t be excited about planting corn next year, either, making wheat a safer crop.

I believe there is a bias toward lower U.S. acres that could eventually lead to a solid price recovery for the wheat complex. That’s why I have suggested to end users that they need to get their inventory needs locked up for at least six months and be prepared to increase if we see a runaway event in corn. Remember, as corn goes up, more wheat will be fed, which only increases demand for wheat products.

Those with short hedges should roll them to December 2012 to capture carry. Don’t be short the nearby contracts. This is the big advantage of selling futures rather than using cash contracts at the local elevator. Once the spreads contract, back roll the hedges in futures. This cannot be done with forward cash sales.


Sales index: 7

Heavy near-term cattle placements and herd liquidation due to extremely harsh conditions are leading to near-term price weakness. Once we get through this, I see better prices for 2012 and beyond.

Do everything possible to keep your herd in check, but have 100% of expected 2012 feed needs protected by mid-September. In fact, if you are in a grain-deficient area, the possibility of the cash basis going premium to futures is quite high. The only effective way to offset this exposure is to have 100% of expected cash inventory bought by this fall. Since many producers may find this difficult due to their ability to store, the only alternative is to buy extra futures units of corn and meal. It is not an exact science, but I would not discourage producers from being 150% long futures of projected feed needs on any correction of December corn below $6.70.


Sales index: 8

Will $8 corn prompt herd liquidation or will hog producers look to feed something else, such as wheat? I believe there will be a little of both, which is called demand destruction.

As a result, expect price pressure this fall in the October futures; sell at $90 or higher. Put all hedges in the October rather than deferred contracts. Further out, I see stronger prices for hogs once tighter numbers are confirmed. However, it is important to protect input costs. Get control of corn in cash first or buy the board. Other inputs, such as interest and cash rents, have long-term upside exposure but are not as critical as controlling corn and meal costs. All feed needs be locked up in the next 30 days.

Back to news


Spell Check

8/28/2011 05:37 AM

  How many of the cattle placement numbers are cows,[not feeder catte] entering feed lots in the southern plains due to drought?

8/28/2011 05:37 AM

  How many of the cattle placement numbers are cows,[not feeder catte] entering feed lots in the southern plains due to drought?


Corn College TV Education Series


Get nearly 8 hours of educational video with Farm Journal's top agronomists. Produced in the field and neatly organized by topic, from spring prep to post-harvest. Order now!


Market Data provided by QTInfo.com
Brought to you by Beyer