December 9, 2010
With never-ending price volatility, corn market swings of 30¢/bu. up or down (70¢ for soybeans) are forecast for 2011. And that’s in one 10-minute ticker span. Wild projections were the norm when Corn & Soybean Digest quizzed two noted market analysts about what growers should expect for 2011. We also asked three growers to lay out their marketing plans for the coming year.
All see bullish pricing opportunities ahead, but fear market volatility can just as easily crater prices in a heartbeat. Here are their views on what will likely impact markets, potential price ranges and what will persuade them to pull the trigger.
Economist and analyst outlook
Michael Swanson, economist and financial analyst for Wells Fargo Bank, Minneapolis, MN, says corn and soybean markets are far too volatile and influenced by far too many forces to forecast prices for 2011.
“I don’t have any price expectations,” he says. “Domestic economic demand growth should be relatively strong and global demand very strong, but this market has made fools out of us too often to try to base predictions on fundamentals.
“This market is about matching opportunities and risks. The supply and demand tables are a necessary exercise, but they won’t shape prices as much as expectations and speculative buying,” says Swanson.
Growers should view crop production on a margin-oriented basis, based on their input costs and expected yields, he says. “It’s too easy to be blinded by the dollars with today’s price volatility in inputs and crop prices. However, the reality of who gets the yield never changes.
“If there are 175 bushels of corn/acre in the field, you’ll never go broke if 25 bushels are yours free and clear to sell.”
He adds that the still-poor economy isn’t shrinking the growing demand for corn and soybeans. “The global demand growth for better food supported by corn and soybeans is alive and well.”
Excessive volatility is sure thing
Excessive volatility is the only sure thing about corn and soybean prices, says Richard Brock, president of Brock & Associates and market analyst for Corn & Soybean Digest.
“Of course, weather will play a major part in determining prices,” says Brock. “But the value of the dollar, the overall world economy, energy prices and ethanol will also be major factors.
“I expect corn demand for ethanol to increase and I see a strong Chinese protein demand that can mean more U.S. sales of soybeans and corn there. The Chinese demand for DDGs (dry distillers grains) is a big sleeper for 2011.”
Brock doesn’t think the world recession is over. “If the U.S. dollar continues to plummet and foreign countries quit buying the dollar, the impact could be quite negative here but also on China, leading to one more leg down in the world economic crisis. “This could cut demand considerably and be negative on prices. All of these indicate that the volatility will remain excessively high.”
Don't try to outguess markets
Kip Tom doesn’t try to outguess corn and soybean markets. He looks at the rate of return each provides for his 16,000 acres of production in Indiana and another 4,000 in Argentina.
“We’re producing good crops on good soils using good genetics, traits and technologies,” says Tom of Leesburg, IN. “If I have a known quantity and can manage costs, I can hopefully protect margins. We’ve been transitioning our market plans toward return on investment.”
Tom leans toward using options “to protect a floor and still have upside potential,” he says. “We’re also looking to aggressively sell for 2011, 2012 and 2013.”
For 2010 and 2011, he has established both corn and soybean “fences” to leave solid upside potential. “We have corn floor prices protected at about $4.75/bu. using put options,” he says. “For the upside, we’ve fenced in a trading range by selling $6 call options. We feel we can make money in that range.”
With options spreads, he can lower the cost of put option price protection by selling out-of-money call options. The trades are for various months to handle staggered sales into 2011 and beyond. For beans, “we have fences using $9.50/bu. puts and $11.50 calls.”
Accumulator contracts are also in Tom’s strategy of making aggressive sales. (See related story, page xx.) With accumulators, he commits the delivery of a certain number of bushels over a long time horizon at a price usually above a set futures price. It gets back to Tom knowing his production costs and determining what level of margin he wants to obtain.
“We look at marketing crops several ways,” he points out. “First the price, then basis, then the spreads in the market. We try to maximize all three. In a year like this, with wide basis, we’re storing the crops (to make sales when the basis narrows). We’ve increased our storage capacity to 2.7 million bushels.”
Tom is “bullish on agriculture” across the board. He expects increased demand for corn and soybeans, thanks to world population gains and higher living standards in developing countries. “We see great opportunities to market our products,” he says. “Producers will be asked to do more with less.
“U.S. farmers will find a way to meet the demands of the market. “That’s why demand for corn acres will increase across the Midwest. More wheat has been planted due to higher prices and good insurance protection for that crop.
“So there could be a shortage of corn acres. Some are thinking 90-93 million acres of corn. I don’t think that’s enough as we look into 2011 and 2012.” He also sees more investment in farmland by those outside agriculture.
Tom believes markets for U.S. corn and beans would be even higher if not for government trade policy. “We have great markets at our fingertips (like through the Colombia free-trade agreement), but we’re not seeing them because of government inaction. Those are things that can influence markets.
“Ethanol should remain as a strong market for corn.”
Good risk management is a must
Russ Keast farms several thousands acres of corn and soybeans near Macedonia, IA, on his family’s century-old farm. He markets much of his corn through his feedyard and hog-finishing operation. So good risk management is a must.
“We don’t look at dollar targets as much as we look at market signals,” he says. “We watch the weekly charts more than the daily charts for macro signals. We try to remain as emotionless as we can.
“We were 75-80% sold on soybeans by the first week in October (cash sales),” he says. “We started and finished those sales mostly in the mid-$9/bu. range. We also sold short calls (to add potential profit to our position), but as the market matured, we were able to get out of them without much of an expense.”
Keast works with a risk-management consultant, Bill Haupts, independent contractor with Russell Associates. Haupts has limited power of attorney to make trades. “I don’t like to deal with a broker,” says Keast. “I work regularly with Bill to develop strategies. We discuss our plan, then he makes trades based on those strategies.”
Following the bullish crop report, Keast and Haupts were waiting for the limit-up rally to settle in before making final decisions, especially with the volatility.
As for corn, Keast sold some early on – “but the markets haven’t given us any long-terms signals to sell.” Much of his crop is marketed through the farm’s feedyard, where he often gets more out of corn through pounds of gain. “We’ve sold corn to our feedyard on a weekly basis and kept our cost of gains in the mid-60¢/lb. range (much lower than the average COG),” he says.
He saw the potential for corn price increases before the October crop report and bought short-term corn call positions to get through the report, he says, adding that some additional profit was taken with the limit-up prices. “We did it to avoid some of our risk in feeding cattle. The strategy worked.”
Keast feels 2010 has been an anomaly. “If you can sell at a price you like, one that produces a profit, you go with it, then start on the next year.”
Old fashioned marketing
Jim Klever and his son Ryan, grow corn, soybeans and wheat on just under 4,000 acres outside Lena, IL. He calls himself “a little old-fashioned” when it comes to marketing and normally doesn’t make out-of-year sales unless there’s a major rally.
“I don’t make a huge amount of sales ahead of time,” says Klever. “I’m usually against selling too much that I don’t have. Sometimes I’ll sell just after the first of the year if prices are good.”
Even after the October crop report showed fewer corn and soybeans and generated bullish prices, he held off on 2011 sales.
“USDA changed its projection for corn prices to well over $5/bu. I don’t think we’re at that point,” he says. However, he has about 10% of his 2010 corn sold via an average price “equalizer program pool” on sales from February through July through Consolidated Grain & Barge at a $4.07 futures average.
“We placed corn in the pool, designed to obtain a stronger prices through more volume,” says Klever. “Some of it was sold at $4-plus/bu. based on the March 2011 futures contract; more of it is priced off the July 2011 contract. That’s for June delivery corn sold at over $5 on the futures. Overall we averaged about $4.50 futures and will set the basis when it is delivered.”
He doesn’t use many futures or options contracts unless he sees a chance to manage risk more efficiently. “We had some puts on corn early in the year,” he says, “at $4.20 on the December contract and a little higher for March (2011). We wanted some downside protection for what our crop insurance wouldn’t cover. We got out of the contracts after the September rally.”
The Klevers have on-farm storage capacity above 500,000 bu. to spread deliveries into spring and early summer. “I had some old (2009) corn left and sold at $4.25 in September,” he says.
As for soybeans, he’s in no hurry for 2010, much less 2011. “We had only 10% sold up to and during most of harvest,” says Klever. “I like the demand situation for beans. When we get to $11/bu. cash, I’ll sell some more.”
Late November 2010
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