Prepare to Embrace the Bear

12:12PM Jul 08, 2008
( )

Sales Index Key
Excellent sales opportunity 10
Excellent buying opportunity 1

Corn 8

The corn ranking is at 8 and should be at 10 by the middle of June if we hit the gas on this corn market. Currently you should be 50% protected on 2008 in a long put strategy, 30% on 2009 and 10% on 2010 as we get above the $5.80 level. I will be on the edge of becoming a screaming crazy bear if we get the deferred corn markets into the $6.20 to $6.80 price range.

Now is the time to start thinking about how you're going to try to defend your long-term profit margins. With help from your banker lock up as much of your 2009 fertilizer, seed and other inputs as possible.

It's time to wake up, look in the mirror and say, "I love the bear!”

Beans 9

The bean roller-coaster ride is getting extremely difficult for producers and advisers alike. The problem in Argentina and the current tight stocks make the talk of sharply higher price values in July and August a very strong possibility—and in the same breath we talk about an acreage shift in the U.S. as a result of the late season.

Try to sell March 2009 close to $12 cash. Then, turn around and take out an insurance policy on your cash sale by buying a March $14/20 vertical call spread. At present time, this costs approximately 50¢. Hold the vertical call spread until late July to early August until we are sure about yields. At that point, I expect at least a 50% loss in the premium or a reduction down to $11.75 cash selling price. In this current trading environment most will hold until expiration as an insurance policy. The end result is you lower your net cash sale to $11.50, in the worse case, but you held the insurance policy for a $6 rally just in case something happens. This type of strategy allows me to go to sleep at night knowing I have a floor under the market but still some way to benefit if prices jump!

Hogs 4

Traditionally, the coming days are some of the strongest for hogs, but this year is nothing close to normal. We are dealing with too many hogs on feed, high feed costs and the consumer belt tightening all at the same time.

I sense many producers have been hanging on to inventory waiting to see if the corn situation corrects. As we move into summer and the reality sinks in that corn is going to remain well above $5 for most of the fall and into 2009, I believe herd liquidation will reach full steam in late summer to early fall. This implies price protection is needed for July through October. Place stops below the current trading support levels and hedge inventory if broken. However, I have little interest, if any at all, in locking up 2009 hog prices. Speculators will catch on to the situation and actively start selling the nearby and buying the deferred futures.

If you're going to stick it out, you should already have 100% of your feed protection in place for 2008 and the first half of 2009. Hold this position into late June to early July and then start adjusting coverage for a modest seasonal fall correction.

The biggest concern I have for all livestock producers is that the magnitude of the correction into fall is not going to be as strong as historically experienced. The only positive activity may be a decent correction in meal, but in the meantime you need to be careful. With the tight stocks in beans, the situation could turn dangerous in June, July and August, which means you need to have your bean needs locked up for that time period.

Cattle 7

Essentially, all of the input cost concerns for hogs apply to cattle so there is no need of repeating. The cattle market has been in a downward break since last August. We had the flush out in March and have bounced back. The good news is cattle don t have the inventory problem like hogs. Given poor margins, however, I expect one more round of liquidation into late summer as more feeders call it quits and because of $6 corn to $90 cattle. The good news: those who can suffer through the upcoming tough period will be rewarded in 2009 and 2010.

If inventory tightens just when our export markets finally open, cattle prices could explode. The only problem is that politicians are aware of food costs and will not be quick to help resolve the export problems because it would impact local prices. 

Author's Note: 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/her own risk. Consult your Risk and Options Statement before trading. To comment on Outlook, e-mail [email protected] 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 [email protected] You can read daily comments from Utterback after markets close at