Outlook: Little Reason for a Rally

March 23, 2012 08:12 PM

Spring weather will shed light on how many acres will be planted. If it is wet in the East and dry in the West, we will see an abnormally large amount of crop planted early this year. I expect corn planted acres will be around 93.5 to 94.25 million—well under the general trade expectation of 95 to 96 million. If weather cooperates, I think corn, soybean and wheat acres will be up and all other crops will be hard-pressed for acres.

When it comes to a weather outlook, I assume Mother Nature will average out eventually. Darrel Good of the University of Illinois reports that warm winters in Illinois often equal better, rather than poorer, corn yields. Assume the weather bulls will have at least two chances to try to drive the shorts out of the market. The key is to take advantage of a price event rather than liquidate due to panic about cash-flow exposure.

Profit College. At Farm Journal Profit College in March, many farmers said they made more than a 35% return on investment for the 2011 crop and wanted this again for 2012. They need $6 cash corn and $13 cash soybeans to achieve their goal, and not much of their anticipated 2012 corn crop has been sold to date.

The economic model suggests that we will operate barely above cost of production in the long term. Moe Russell showed a chart from Iowa State University that suggests there have been four price bubbles since 1900: late 1918 to 1920, 1945 to 1950, 1970 to 1974 and 2008 to 2011. In all cases, the market went into the red after the bubble. It’s time to bank the money and prepare for rougher waters ahead!

Sales index:

10 = Excellent sales opportunity

1 = Excellent buying opportunity

Corn: 9

I believe 2012 will be a very rare event year. The high will occur in the first quarter of the marketing year, which has happened only seven times in the last 27 years. High prices in 2010 and 2012 slowed demand but also increased profitability and expansion of supply. The only variable that can sidetrack the bear trend for 2012 is weather.

I strongly recommend farmers be aggressively priced prior to spring plantings in the September corn contract, which has been trading in excess of 30¢ premium to the December contract. To help control emotions and cash-flow exposure going into the spring/summer, establish a short position using a deep-in-the-money put. Hold this position until midsummer, then roll it into a cash or futures position once you are comfortable with planted acres and yield prospects.

Next year has limited upside potential; it will be difficult to get December 2013 to $6. Be aggressive and sell in the 2012 contract now and then roll forward this fall; or wait until summer and hope we have a weather event to drive the market to the desired price levels. Frankly, the odds of seeing this are less than 1 in 5—not what you want to bet the farm on!

Beans: 8

The November soybean contract was able to breach $13, which I did not think would happen. This market will stay firm until it is sure it has more than 75 million acres confirmed. Then, we wait for a July/August dry weather event. For this reason, I prefer that producers sell off the combine with limited cash-flow risk or in a deep-in-the-money put. I have limited interest in being short futures unless farmers are well financed and have adequate cash flow. Long-term, I do not like the prospects of the 2013 pricing structure. If we see the 2013 contract move above $12.50 to $13, consider a multiple-year hedge position and buy upside call protection this fall against weather.

Wheat: 8

The wheat market is struggling to rally because of big global supplies, good crop conditions and negativity in the corn complex. There is little reason for a rally unless we see real damage in corn, suggesting all hedges should be held. By now, all inventory should be sold. Feed buyers should purchase between July and September. Those who are aggressive might consider buying December corn puts to protect long wheat futures, as a cross-commodity hedge feature.

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Spell Check

3/25/2012 06:26 AM

  BS! Traders know the Goverment is lying...corn is flying...thats why cash prices are strong. Last years numbers where Obama inspired crap. There is not as much corn as people think there is. 800 Mill bu carry is 1 drought away from running out. The Goverment has 1 last chance to fess up on March 29th. Your bear market is only a result of the index funds...that don't know a bushel of corn from a phone booth.

3/27/2012 02:15 PM

  Has Bob ever said not to immediately sell everything?


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