Outlook: Prepare for Variability

December 8, 2010 03:48 AM

We started the year with $4 corn and $9 soybeans, and we’re ending at $5-plus corn and $12-plus soybeans. Regardless of where we go from here, the bulls have enjoyed a good run. As we look to 2011, there are as many uncertainties as ever, which makes it hard to give producers a black-and-white answer to the question: Should I sell or not?

Global impact. The biggest uncertainty is export demand. News that China’s central government wants to slow down domestic food inflation has spurred speculation that it is about to cut demand. The problem is, the country’s population has more disposable income and desires a better diet. Remember, China is the world’s largest pork producer, which requires a lot of corn and soybean meal. Going backward would be extremely difficult. The Chinese may talk about putting downside pressure on prices, but they can’t simply walk away completely. The key to watch now is how domestic Chinese values trade during the next couple of months.

The second big question is how fast global supply will rebuild. Domestically, in years with drastic yield declines, the pattern is to lose yield until the final report in January. I see no reason to doubt this trend. The general trade expectation is for at least a 1-bu. swing in corn but limited change in soybeans. The winter wheat crop is off to a rough start due to dry conditions domestically, and there are rumors of problems with the Argentine crop. All these unknowns could result in most of the supply bullishness being factored into the market by late January, which should pressure demand prospects.

Crop mix. How does the ambiguity play into producers’ crop mix this spring? The recent run-up in cotton prices is expected to prompt Southern producers to plant more acres, which will come at the expense of corn and soybeans. The current thinking in the trade sector is that corn acres will increase by up to 4 million acres but that soybean acres will decline by 2 million acres.

While budgets generally favor corn more than soybeans, pro-ducers are resistant to changing their planted acres unless Mother Nature prevents plantings. I think it will be difficult to get enough corn to meet demand; consequently, prices will have to remain firm to ration demand until we get into the new crop.

Manipulative weather. The last big variable will be the weather. How fast will the dry soils in the Midwest rebuild? Are we entering another dry year like 1988, or will Mother Nature respond with good winter moisture and set up the potential for a record supply? I don’t know how things will turn out. All I can say is that $5.50 December 2011 corn and $13 November 2011 soybeans will be exceptional profits that need to be protected. Work hard to achieve these price points as we move into the first quarter of 2011. If we do see a summer event, use the rally to sell expected 2012 and 2013 inventory at historically large profit margins.

Action steps. I hope you have most of your 2011 inputs locked up. As raw demand increases for products along with inflationary pressure, it only eats away at the bottom line if inputs have not been secured.

While I realize a lot of producers hate futures and see cash-selling as more desirable, remember that those who sold cash corn at $4 rather than using puts left a lot on the table this year. If early sales are made, upside price insurance is needed if we start to make new highs after mid-April, which should occur only if a weather event develops.

Start making plans now with your banker on what you are going to do if a 2011 spring or summer weather event occurs. With profits running more than $250 per acre or higher, it is only a matter of time before supply is increased and demand is rationed. I’m willing to put it on record that within two marketing seasons you will see lead month futures close to break-even values.

In summary: Market activity during the first half of 2011 could prove to be extremely violent, both up and down. With this excessive volatility comes great long-term profitability. If history has taught me anything, it’s that during such times it is extremely difficult to act unless you have a firm set of marketing targets and a plan on how to hit them.

The information provided is believed to be reliable. There is a risk of loss associated with trading futures and options. Anyone acting on this information is doing so at his or her own risk. Consult your Risk Disclosure Statement before trading. To comment on Outlook, e-mail Outlook@farmjournal.com. For information on risks and strategies or to subscribe to Bob
Utterback’s Internet site or e-mail service ($400 per year), call (765) 339-7704 or e-mail
bob@utterbackmarketing.com. You can read daily comments from Utterback after markets close at www.farmjournal.com.

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