Outlook: Cover Your Basics

December 9, 2011 07:12 PM

Harvest is over, the bin doors are shut. While we have our annual snags with the weather and planting, harvesting and selling crops, being a farmer/rancher is still one of the best occupations! As we move into turbulent economic times, take stock in the things that matter: family, friends
and health. Having your basic values covered often makes the difference between success and failure.

Sales index:

10 = Excellent sales opportunity

1 = Excellent buying opportunity

Corn: 6

For the next several months, it will be all about demand. Will the Chinese buy, and how much? Will crude oil stay firm and keep interest in ethanol even without a government subsidy? Is the acreage mix set since many producers have forward-bought inputs for 2012, or will we need price strength come spring to assure corn acres?

For now, it appears many producers have put grain in the bin with the hope of firmer prices next summer. There is risk involved if we get the necessary planted acres and trendline yield: December 2012 could move below $5 before the September supply and demand report high.

In fact, the risk of an early spring high is likely, making it difficult for producers to price their crop because 1) it will be below their expected $7 cash corn target price, and 2) they will be holding a large portion of their 2011 corn unpriced in the bin.

Suggested strategy: Make plans to sell December 2012 corn between $6.10 and $6.25 in March and April via an in-the-money put rather than forward cash sales or futures contracts. This alternative gives downside price protection and allows participation in a May to July price event if a supply reduction should occur.

Beans: 7

Soybeans have lost their luster for the bulls. Carry- over is drifting higher and the numbers could increase rather than decrease. The South American crop got off to a good start, but the keys are the weakness in the soybean meal market and the ability of the crushers to get a solid profit margin.

Suggested strategies: I am concerned that many producers holding 2011 soybeans will not see the flat price rally they want and hold crop supplies into summer. There’s significant downside risk exposure if they’re not correct. Use any concern about South American production in the first part of 2012 to move product as close to $12.50 or higher. If long-term downside risk is high, 2012 soybeans could see prices below $9.50 if we have trendline yields and stagnant global economic growth in demand.

Wheat: 5

The possibility of fewer planted acres will work to producers’ advantage. The long-term concerns about outside markets and potentially bearish soybean and corn activity could put downside risk on wheat prices.

Suggested strategy: Take advantage of strong seasonal prices in December and early January to clean out bins of unpriced 2011 inventory. Get a base under expected 2012 crop. If carry continues, sell December 2012 over the July by using futures instead of the preferred put strategy.

Cattle: 9

The April cattle contract has been trading between $1.25 and $1.30 for so long that it has lost its impact on producers. However, this is an excellent selling level for expected spring inventory. The outside economic factors could stabilize for 2012 and even improve a bit, giving producers a false sense of security.

Suggested strategy: Limit hedging of winter and spring inventory. Don’t allow the market to move below $1.25, but keep the upside open. Keep control of input costs to ensure profits.

Hogs: 7

The hog market should be on the upswing in December due to holiday buying. The upcoming increase in export sales due to government trade deals also could improve the picture.

Suggested strategy: There’s no hurry to sell hogs unless the lead month futures break below $88, and then only in a defensive measure. If there is buying and the market reverses, be ready if the bear trend can’t hold.

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