Outlook: Understand the Risk

October 18, 2012 02:12 AM

Producers are harvesting, and in many cases the crop is as bad as they feared. Plan on average yields at or above 123 bu. per acre for corn and 35 bu. for soybeans. Now that reduced yields are a reality, farmers want higher prices to lessen the blow to their pocketbooks. Basis is heavily weighted toward putting grain in the bins and waiting until spring or summer to sell.

When $8 corn and $18 soybeans are put in the bin, farmers assume a lot of risk, including direct storage, quality management and high opportunity costs. I estimate it will take 10¢ per bushel per month for corn and 20¢ for soybeans to cover all costs and some type of risk premium. For six months of storage, cash corn might need to exceed $8.50 and soybeans $19.20 to really pay. Remember, these numbers are the highest in history at a time when the world economy is still weak in the knees.

Sales index:

10 = Excellent sales opportunity

1 = Excellent buying opportunity

Corn: 6

From the $8.50 December corn high after the August supply and demand report to the $7.59 low after the September report, the market has taken out a lot of the excessive price movement. A quick harvest should keep prices on the defensive; it will
be hard for December 2012 corn to stay below $7.50 for any length of time. Old crop should be tight—expect sideways to higher price trends into the summer.

How fast will demand react to higher prices? With the September price correction, many have extended coverage through the first half of 2013 on paper. As the cash price solidifies, much of the adverse price impact should be offset by informed end users, which could keep prices strong. The need for quality cash corn could cause unusual cash price action. I expect strong interest in taking delivery of grain contracts on the river system and then moving it into the country.

If a weather event occurs next summer, use a strategy that gets a floor under the market and allows for upside price flexibility to improve the selling price. Don’t sell cash or futures. Using options is expensive, so merge all the market tools together to create an artificial futures position with a known risk exposure.


Beans: 6

While we might have seen the lowest soybean yields, domestic and global stocks are razor sharp and demand must be rationed. This should keep pressure on the futures market and make it difficult to break hard until we are sure a decent crop is coming out of South America and more soybean acres are planted in the U.S.

If these standards are used, time should be on the side of the bulls regarding old crop. In other words, if anyone plans to store and go for the big payoff, soybeans could have a better chance than corn.

What applies to corn risk protection applies to soybeans as well. It is hard for me to tell anyone to put $18 cash soybeans in the bin until summer. I also cannot tell anyone to be long futures when daily price movement could be significant. I implore everyone who wishes to participate to buy in-the-money calls at their total storage cost and the risk premium they wish to accept. This strategy will force users out of the market when they feel conditions have changed, not when the bank account is real low.


Wheat: 9

There is some excitement in wheat because of a fundamental supply problem worldwide. Many corn end users thought they would be able to use low-priced wheat, but it’s been more aggressive than normal. It’s dry where U.S. wheat is grown, and there’s little improvement in the forecast.

Overall, old crop wheat prices are positioned for sideways to higher values. If old crop is still unpriced in the bin, a solid chance for higher values appears to be there for the taking. But new crop July wheat, which has traded above $8.75, has the same problem as 2013 corn and soybeans. The deferred contract is under nearby values, making it difficult to sell. Wheat producers should use the same strategy for corn and soybean producers—get a floor in place and don’t sell cash or futures. If there was ever a year to have upside flexibility, I believe this is it.

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