Outlook: Bring Your “A” Game

January 7, 2014 07:55 PM
Outlook: Bring Your “A” Game

The Environmental Protection Agency (EPA) is taking comments until Jan. 28 on the proposed adjustments to the 2014 Renewable Fuels Standard (RFS). If you haven’t already, take some time to voice your opinion by visiting www.regulations.gov. Click on the Renewable Fuels Standard Program in the list of proposed regulations and then select the blue "Comment Now" button.

The proposed standard calls for a 1.4-billion-gallon reduction in ethanol, which would slash domestic corn usage by 400 million to 500 million bushels in 2014. The bulls say this move will reduce prices, thus encouraging exports to pick up. That’s won’t happen until down the road, though, and farmers have bills to pay today. My 2¢: If EPA is going to adjust the RFS, they should do so gradually so it does not drastically impact prices.

The other factor that requires immediate attention is developing a strategy for 2014. When it comes to crunching the numbers and looking at ways to manage risk, many producers put it at the bottom of their to-do list. The problem now is we might have a situation developing where producers are going to have to use all their wits to assure 2014 does not become a serious drain on net worth.

I’ve been working with a group of producers to study the influence of crop insurance, cash sales, and futures and options strategies on the bottom line. For example, let’s start with a 2,000-acre operation in Montgomery County, Ind. I estimate total costs for corn at $850 per acre, yield of 165 bu. and 80% crop insurance coverage. If this farmer strictly relies on crop insurance and no forward sales and we see a yield of 165 bu. nationwide, the possible negative impact requires immediate attention. This model farm would end up under water by more than $476,000 by the fall of 2014, if December 2014 corn would go off the board at $4.

So what can we do?

  • Remember all costs are variable before the crop is planted. This means this is not the year to do any experimentation. This is the year where you want the maximum bushels for the least cost possible. This is nothing new, but this year, it’s more vital than ever.
  • While it’s early to start thinking about next year’s basis levels, if old crop corn is held and inventory is confirmed, wide basis will be a serious risk next fall. Subsequently, if on-farm storage is limited and the crop must be sold off the combine, it is imperative to start locking up fall basis sooner rather than later.
  • Now comes the hard decision: Do you simply wait for higher prices to bail you out, or do you proactively try to enhance your position beyond what the market offers?

This is why now is the time to get serious about crunching numbers and developing a marketing plan. Start managing your risk; don’t be a victim.

Hog wild. Many times I find myself focusing on the crop sector, but the pork complex merits some attention.

hog corn ratio

A drop in corn prices and a rally in hog prices could send the hog/corn ratio to record levels by mid-2014, which historically leads to herd expansion.

As most pork producers already know, and the rest of the industry needs to be aware of, there’s a serious disease sweeping through the hog industry that could significantly reduce inventory. Porcine Epidemic Diarrhea Virus (PEDV) is deadly to young pigs. The virus was first diagnosed in the U.S. in May 2013 and has now spread to more than 10 states. PEDV could bring market inventory to a screeching halt. 

Summer markets are expected to be limited when the hog market makes seasonal highs. While it’s difficult to predict how high the market can move before demand is impacted, I think that price point is trending higher. Don’t get wrapped up in trying to decide how high this number can go, though.

For hog producers, this is not the time to be net short futures or short cash. Rather, minimize the impact of a forward sold decision—specifically, summer cash commitments that need to be protected from upside risk. If anyone is short futures positions, aggressively roll them into puts at technical support levels. The market could possibly push to record highs.

This evokes an interesting situation for the hog complex. Not only do we have tight inventory numbers, but if the corn market continues to develop a bearish bias throughout the fall of 2014, it could move the corn/hog ratio to record levels. Historically, record levels motivate gilt retention and subsequently long-term building of supply.

The supply side will likely be razor sharp for most of 2014 for the hog complex, much like the corn market was bullish in summer 2012. I’m guessing many corn producers are kicking themselves for not selling multiple years.

In light of the lesson corn producers learned the hard way, hog producers need to get started on a multiple-year selling plan for the last half 2014 and most of 2015. For the producers who are not being affected by PEDV, they will be richly rewarded with higher prices.

More than 30 years of commodity insight helps Bob Utterback guide farmers through a disciplined approach to marketing. Contact Bob:

E-mail: butterback@farmjournal.com
Websit: farmjournal.com/outlook

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