Producers have done their job – producing the crop. We are coming off a good crop in many areas and the bins are full. I believe an unhealthy percentage of the 2018 corn crop is still on the farm unpriced. Soybean movement has been better, but a significant amount of inventory needs to be priced. Wheat supply is normal.
South American producers have increased their corn and soybean acres and the prospects for an average plus crop seem to be very high at the time I write this outlook. So the pressure is now on the demand side of the ledger to prove the bulls’ argument that demand will grow. Trade conflict with China has come to a boiling point, causing problems. While an eventual resolution will be seen, neither side will get all it wants. In the end we will see China come back to the table and buy our soybeans and corn, but it will be very slow at first. In fact, I believe we will only see significant price strength if and when a major producer like us, South America or China, has problems.
In conclusion, I believe 2019 will be a very difficult year for everyone associated with agriculture. We all want a quick solution; unfortunately, unless there is a major supply reduction event somewhere in the world, the potential exists for a range bound market with a downward bias. Prepare for carrying charge markets, wide basis, and limited flat price rallies in corn and soybeans.
Old Crop: Sell the carry immediately in the July 2019 contract; focus on getting 100 percent priced as close as possible to $4.00 July futures. Lock up basis in February and March. If anyone has a bullish bias for a spring/summer event, buy after the March supply/demand report, but before the March acreage report in a limited risk long strategy.
2019 Crop: With increased corn acres and big domestic stocks, it appears the possibility of December 2019 corn taking out the 2017 high is limited. I suggest producers be aggressive sellers of expected 2019 corn production between $4.04 to $4.12 using 40-50 cent in-the-money December puts to set a floor and reduce time value cost. I suggest capturing 40 - 60 percent of any upside price event due to an unknown weather event by rolling up puts.
Old Crop: Plan to sell all inventory now or store all the way to late June to early July. The only way I see soybeans rallying is if there is a quick resolution to the China trade situation, coupled with a significant yield reduction weather event. With South American crops looking good, the only real potential for soybeans is storing them to next summer. In the past I suggested dumping all inventory. It can be reowned during March before the influence of weather becomes a factor.
This complex saw reduced planted acres that helped to stabilize values, but limited overall price improvement can be expected with the extremely bearish outlook for corn and soybeans. I suggest making seasonal sales and planning to have all expected 2019 inventory priced during February and March [winter scare time period.
While a lot of the attention is now on the grains and outside equities markets, the hog market has experienced a nice seasonal price improvement. I favor aggressive forward selling of expected 2019 inventory above $85 using deep-in-the-money June puts. My main concern is for the last half of 2019; if the corn and soybean markets experience price weakness, expect an increase in pork production. Subsequently, one must be ready to make aggressive forward sales during the first half of 2019.
The new Canada-Mexico-USA trade agreement has helped to stabilize the beef complex prices. The issue moving forward is, if the general economy moves into a recession and consumer dollars tighten, we will see consumers move more to purchases of pork and chicken at the expense of beef. Thus I suggest being an aggressive seller of the deferred cattle contract as we move into the normally strong seasonal March to April time period, even with the deferred contracts discounted to the nearby contracts. Bottom Line: Long-term, I see more downside than upside potential for cattle prices in 2019.
Controlling operating costs is very important. I believe only limited upside risk exists with regard to an increase in interest cost. The area of most control is most likely fuel cost; lock up fuel costs at the mid-$40 crude oil price.
It looks as if land costs are hanging in there and could result in a modest increase in cash rents rather than a decline. Overall, I suggest budgeting next year’s total costs 2 percent higher than the 2018 figure. This suggests producing corn and no soybeans. This will be the big issue during the first half of 2019. What changes, if any, will producers implement in 2019?
About the Author
Bob Utterback is the President of Utterback Marketing in New Richmond, IN. Call Bob for strategy updates at 877-898-4324. Email comments on Outlook to firstname.lastname@example.org.
The opinions stated herein are not necessarily those of GreenStone Farm Credit Services.
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