Sales Index Key
Excellent sales opportunity 10
Excellent buying opportunity 1
As I write this, the bulls are stampeding and the bears are in hibernation. We are in the midst of the perfect storm—there’s a major supply reduction in corn, end users are essentially unprotected, the market is concerned about inflation and wants to buy things, and we don’t know how far prices have to go before demand is rationed. Emotions are as intense as in any of the bull markets I’ve seen.
The bull market of 2010 will go down in history as one of the big ones. If you look at past great bull markets (1972, 1988, 1996 and 2008), they have these things in common:
- They were very violent at the top and, in most cases, exceeded market expectations.
- Demand rationing was not as immediate as one would expect. Even if end users get long protection in place, we may be surprised how long it takes to ration usage.
- The producer often has limited inventory to sell since it’s normally priced at lower levels and yields are simply not there. By its bullish nature, the market moves up quickly when an imbalance between supply and demand exists. Essentially, limited free stocks exist at the top. Producers may feel like they failed in the marketing of their crops, and then wait too long to sell next year’s crop in the hope of “making up” for early sales.
In a great bull market, you see the loss of all carrying charges as the nearby contracts go premium to the deferred. End users want inventory now, not in the future. This creates a dangerous situation for producers. Even if the market reaches producers’ target prices to lock in a profit, they find it very difficult to sell deferred contracts when there are such big discounts nearby.
What should we look for as a signal of a top? I will be looking for several things: At the top of the market, option premiums will fail to keep up with the futures. The basis will widen as the futures continue to rally and elevators fight against the increase. In technical action, the markets should be developing a double top, but I fear this rally will end in violence. We are in place to see record volume and open interest by trading funds. Perhaps the most dangerous factor is how aggressively the longs will take profit.
Wheat at $7.50 and double-crop beans at $11.50 should attract a lot of U.S. acres. However, with adequate global wheat supply, wheat’s upside price potential is tied to how corn and soybeans trade over the next six months. The ability of July 2011 wheat to move beyond $8 will be limited. Bottom line: Get a floor under anticipated 2011 wheat pro-duction and prepare for multiple-year sales. I like vertical put spreads or aggressive option strategies that have significant downside potential with limited upside risk.
USDA projects stocks at 265 million, much tighter than we thought back in June. Frankly, I’m a little surprised soybean yields did not increase.
With $12-plus soybeans, I doubt many producers will store beans, setting up an interesting situation for old-crop soybeans. If South America has any problem and China’s internal prices remain above $16.50, there will be a lot of price pressure on soybeans next summer. Higher cotton prices will also put pressure on Southern soybean acres to remain competitive.
Overall, soybeans will follow corn’s lead, unless concerns rise about South American yields. If you still have cash soybeans, sell them for January delivery and take the cost of storage and a little risk premium and buy a vertical call strategy in the July contract.
For 2011 soybeans, I strongly urge producers not to sell cash or futures. Instead, use puts to lock in a floor but allow for upside potential as the market reaches profit objectives. If you sell at $11.50, you might lock in about $175 per acre before basis. My target is closer to the $200 per acre level.
With the potential for the corn crop to get smaller from now to January and revisions in stock numbers, corn prices are going to stay higher than end users want. Lead-month corn will find it hard to move below $5 until 2011 acres are assured.
If you sold enough corn to meet cash-flow needs, move slowly into the first quarter of 2011. Once the market gets above $6 in lead-month corn, you could start to lay off risk by selling cash, but I still suggest trying to maintain ownership by spending 30¢ to 40¢ for as much upside call protection as possible with vertical call strategy.
Real challenges are ahead for 2011 corn. Move slowly by using a trailing-stop strategy based on a moving average or violation of critical support.
Be cautious about cash-flow exposure. Lean toward using a put strategy rather than a cash or futures strategy.
Input costs will explode now that producers see big price increases. I cannot underscore enough the importance of getting your 2011 and 2012 input costs protected.
Finally, the most radical suggestion: I know producers like their crop mix, but if ever there is a time to consider moving to maximum corn production, this is it. The logic behind this is that you would be growing corn for 2011 with cheaper inputs, and when input prices go higher for 2012, you can move back to soybeans, which require less inputs, but still lock in a profit.
The bears are in hibernation during the storm; but when they wake, the bulls will be fed and ready for slaughter.
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Utterback’s Internet site or e-mail service ($400 per year), call (765) 339-7704 or e-mail firstname.lastname@example.org. You can read daily comments from Utterback after markets close at www.farmjournal.com.