Utterback: What Will Spring Bring?

March 15, 2013 06:17 AM

Farmers are anxious to begin spring planting, but "hope" is now the predominant emotion driving grain marketing plans. Farmers hope the market will recover enough to make storing crops look good. They hope December 2013 corn and November 2013 soybeans will recover to profitable levels. They hope for good spring planting and normal rains.

bob utterbackThe problem is that the hope for higher prices lies firmly in weather problems, which implies someone has to get hurt. In the recent baseline 10-year projections from USDA, a bleak picture emerged, suggesting if we move back to trend line yields prices will significantly drop during the next two marketing seasons.

This is due to demand going flat and acres increasing globally. The big uncertainties are yield and weather. As we get into May, if prices break out to the upside, sellers need to be extremely careful about cash flow exposure. Equally, if the market breaks to the downside, bulls need to be cautious with cash exposure.

By the time you read this you will have made your decisions about crop insurance. I hope you took advantage of it to ensure a safety net.

Corn 12345678910

The February correction took the wind out of the sails for the bulls near-term. The good news is this correction could help lower prices to levels where we can activate solid domestic and possible export interest. This will take a little time to develop, but we will also be closer to the spring weather uncertainty period. Weather and planting concerns should start to surface in late March and potentially offer a solid technical recovery in December 2013 corn prices. I believe a move above $5.90 will be tough, though.

Farmers should buy $1+ deep-in-the-money September puts if and when December 2013 corn trades close to the $5.85 to $5.95 range. To help offset the time value cost of the puts, sell deep-out-of-the-money May or
July puts. To me it’s all about getting a floor under the market and being in a position to improve my bottom line if the price rallies. I prefer to use the put roll-up strategy rather than the buycall-and-sell-cash strategy because many producers buy the calls but fail to sell the cash.

After we get past the May supply and demand report, sellers should be on high alert to not allow the December corn contract to trade above $6.05 without some upside price protection in place. The final technical breakout signal, which would imply all marginable positions are covered, would be a close above $6.50 basis. This will only be seen if there are significant yield problems. If you want me to guess the odds, it’s below 1 in 3.

Beans 12345678910

The soybean market was hit hard in February but was able to rebound on continued concerns about Argentina’s crop. These concerns helped to firm prices before South America’s harvest but will not propel prices to the winter highs. The best to hope for now is for the oversold condition to ease up. For the soybean market to get excited, it will need more interest from Chinese buyers.

As you can most likely guess, potential is building for market violence as we get closer to spring. If acres are up and solid yield prospects develop, the potential for November 2013 soybeans to trade above recent $13.50 highs looks bleak. As we proceed into summer, it is like corn—if the market would start taking out winter highs sometime in late May, producers who are net short futures need to become immediately concerned.

If the market were to close above $14.25, then it’s out of the boat and all ashore because the bulls have their weather scare.

Wheat 12345678910

This year we have two dominant forces affecting the wheat market. On the plus side we have a crop that looks lousy out West where it has been dry. In the Midwest, conditions are decent. The poor crop out West will keep yields down overall, but not nearly as bullish as 2012’s corn crop failure. On the bearish side of the equation we are seeing a lot of international wheat being priced below U.S. levels.

Weakness in demand has been seen as being more bearish than the dry weather event. While time does permit some price recovery, it’s getting increasingly difficult to argue for July wheat prices in excess of $7.50.

Cattle 12345678910

Consumer demand is showing signs of high-price fatigue. With the possibility of the U.S. dollar gaining strength and slowing export growth, you see a market that got a little ahead of itself. In spite of this, the live cattle complex has the best prospect of strength in the 2013 marketing season. If we see heifer retention in late summer to early fall, the potential for a strong price recovery going into the fourth quarter of 2013 will be significant.

Be a cautious hedger of future cattle inventory for most of 2013. Lock up feeder cattle inventory for the fall and then focus on buying corn supplies on fall lows.

Hogs 12345678910

The hog market is a mirror of the cattle market. Many got bullish because of the supply side of the equation. I believe the funds and speculators got too far in front of the market, which forced some panic liquidation due to margin call pressure in February. By the time you read this we should be into the depths of the seasonal February-to-April lows. The market should be close to an oversold condition and prime for taking profits on any big short positions.

Like cattle, there is limited interest in hog producers locking up prices for the last half of 2013; but if cheap corn becomes a reality, then 2014 pricing would be extremely desirable.

The earliest I expect for this type of hedging would be from June to July. Livestock producers, sit back and start planning your strategy for aggressive 2014 hedging if we see a solid price recovery into summer


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