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Drought sets up 2013 prices

Al Kluis 09/05/2012 @ 9:51am

My phone rang continually when the grain markets turned sharply higher in early July. The terrible drought dropped 2012 yield and profit prospects for many farmers across the Corn Belt this summer. It was a volatile and emotional time for many producers as they watched yield and profit potential go down and grain futures go up. That's why it is so important to have a well thought-out risk-management plan.

December 2012 Corn vs. December 2013 Corn

Here is the three-step risk-management plan I've suggested the last four years.

1. Buy the RP crop insurance policy that makes the most sense for your farm. For many farmers, the decision to buy a revenue crop insurance policy in 2012 will keep them farming in 2013.

2. Get some of the insured bushels hedged ahead. A lot of your new crop hedges may be below the market, but as long as you did not forward-sell more than your crop insurance guarantee, you'll be able to settle up on the grain contracts yet this fall.

3. Buy new crop 2012 puts. This year the puts are likely to be worthless at harvest, and you do not have a delivery commitment on those bushels.

Take a long-term view

In this volatile environment, it is very important to take a long-term view. You need to look beyond this year's drought and make plans for 2013. It is important to realize that as the drought intensified in the summer of 2012, price and profit prospects improved for the crops you will grow in 2013.

Here are four key questions to consider when making 2012 and 2013 crop sales.

1. What are the final sizes of the 2012 corn, soybean, and wheat crops? The USDA overestimated the crop yield potential this spring, so could it be too conservative on the final crop harvest this fall?

2. How much demand destruction will occur? So far, the USDA in recent reports has projected these cutbacks in demand.

For corn next year:

• 650 million bushels less feed.

• 300 million bushels less in exports.

• 100 million bushels less for ethanol.

For soybeans next year:

• 115 million bushels less in exports.

• 35 million bushels less in crush.

3. How much will South America be able to ramp up corn and soybean production in 2013? The early indications are for a 5% to 8% increase in soybean acreage next year and 1% to 2% more corn. If normal weather develops in the southern hemisphere, the world will turn to South American supplies by the end of the first quarter of 2013.

4. What are the acreage and yield prospects for the U.S. in 2013? Crop acres jumped by over 9 million acres from 2011 to 2012 and could jump by another 2 to 4 million acres in 2013. Imagine what prices will do by the harvest of 2013 if we have 98 million acres of corn and a trend line yield next year.

November 2012 Soybeans vs. November 2013 Soybeans

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