In the second story of our three-part series, bears explain why crop prices may fall in 2013.
The nation’s top crop analysts are spread across the marketing map, from extremely bullish to extremely bearish, when it comes to corn and soybean prices. Opinions vary on how producers should protect themselves from market fluctuation, although many suggest using put and call options as an insurance policy on both ends of the price spectrum.
Though bulls outnumber bears in this year's survey, the bears make a compelling case that crop prices may fall from last year's record highs. Stocks may well rise if production in the U.S. returns to normal levels and foreign source continue to make gains. The bears' best advice -- sell what you have and hedge your 2013/14 crop.
Click below to read other installments in this series:
Bulls Predict Repeat Performance for Crop Prices in 2013.
Moderates: Prepare for Upside Profits and Downside Risk in 2013
Weighing the Big Disconnect
Crops this year ended up better than we feared, which created higher than expected supplies. There is a big disconnect between the old and new (2013) crop. With corn trading in the $6.80 to $7.50 range and the potential to fall to $5.80 by June, I’d sell now. Corn above $7.25 and basis nearly 50¢ above the board is a good time to sell; I wouldn’t store.
However, this strategy all changes if you expect adverse weather in the coming months. Then you would protect yourself on the upside with a call option. Many see the potential for corn to hit $8 to $9 per bushel based when compared to similar supply years such as 1995, but 2012/13 is not all like 1995.
The key difference is inflation in grain prices. Normal weather could give us 2 billion bushels in carryover by next fall and a huge drop in prices. A similar situation exists in soybeans.
Globally, anything approaching normal weather in 2013 will boost stocks and prices will decline. Old crop corn and soybean stocks are tight, but by next fall, soybeans could easily be $12.50. The biggest price risk for both crops is what happens to planted acres next spring.
Issues are at play in the markets that go far beyond supply and demand fundamentals. Hedge funds at the moment are largely absent, and to drive prices of corn and soybeans higher, they would have to re-enter grain markets. This is a huge factor.
If History Is a Guide
Big bull commodity markets are generally followed by big bears. That’s our 2013 position for corn and soybeans. With one of the biggest bull markets in history in 2012, we expect prices to trend lower into late summer, unless the Midwest experiences major production problems again.
In September, we advised producers to sell 70% of the corn crop and 60% of the soybean crop. We have also advised producers to be aggressive on hedging 2013/14 crops. When markets are inverted (nearby futures higher than deferred), it is not a good year to store.
How low is low? Obviously the answer to this question depends on growing conditions in the spring and summer. Nevertheless, if normal weather conditions occur, the downside objective in nearby corn futures will be $5 or possibly lower, and in soybeans it will be $13 or lower. November 2013 beans could trade under $12 per bushel. This is a good year to be an aggressive marketer.
Corn Stocks Could Swell
Top Third Ag Marketing
While corn export and ethanol demand suffers due to the high prices, feed usage remains strong. The market will try to ration until South American supplies are available. Corn growing countries will ramp up supply to meet demand. The length of fund long positions remains a problem. If South America has a decent growing season and next year’s U.S. weather is normal, world corn stocks will swell. Look for opportunities to sell 2013 new crop corn from $6.50 to $7.
August rains helped save the soybean crop. I expect final bean yields to be higher than the October estimate; however, carryouts remain tight as China’s appetite has not waned. Soybean supplies could remain tight through March or until the market perceives the U.S. soybean crop is 50 million to 100 million bushels above current production estimates. The Brazilian crop could run up to 83 million metric tons (mmt) with good weather. USDA raised world carryouts to 57.6 mmt, which might be too high to sustain $15.50 soybean prices. As in corn, the funds’ long positions in soybeans and meal remain a problem. I would look to price new crop beans on rallies in the first quarter of 2013.
Currency Fluctations Will Take a Toll
Look for soybeans to trade sideways heading into the new year, keying off South American weather for price direction. The "good" U.S. soybean yields should add supply to future USDA reports, dampening the need for large demand rationing and buying time for global end users to roll the dice on a large Brazilian soybean crop. El Niño weather years provide good growing conditions for South America.
In October, USDA provided hard evidence of rationing ethanol and exports, while proof of cuts in feed use will not occur until quarterly stocks reports in January and March. USDA has U.S. exports at a more than 30-year low. Flip the coin over, and despite high prices, global corn use last year was higher than expected.
Recent purchases of U.S. corn by the Chinese tell us that when prices get low enough they will buy and make their own market bottoms. China continues to have a large need for feed grains. The
long-term seasonal suggest a market bottom around this time of year and nonpriced/noncontracted corn will go to on-farm storage. A phenomenal amount of storage has been put up.
Europe continues to be an ongoing issue with huge risk to all markets. A lower Euro and higher Dollar index means lower grain prices for producers. Also some sort of tampering with the renewable fuel standards could be damaging to corn prices.
Whatever you don’t have sold, put it in your bin and play the basis.
Final production numbers are in flux and market volatility is on the rise. Make plans to join us at the Top Producer Seminar, Jan. 30–Feb. 1 in Chicago, Ill., to gain insight and tips from many of the market analysts featured in this story.
This material includes analysis by company employees. By accepting it, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that the above marketing services believe are reliable. The analysts do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice will result in profitable trades.