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Bearish surprise; S.A. drought ending?

Ray Grabanski 01/18/2012 @ 10:01am President, Progressive Ag www.progressiveag.com

USDA dealt us a bearish surprise last Thursday with slightly larger US production numbers than expected, and also revised upward other countries production (like the FSU countries of Ukraine, Kazakhstan, and Russia). The combined hike in US production numbers plus the hikes in world production numbers meant a surprisingly large hike in ending stocks from expectations. That left the market vulnerable to further price declines, and we got a limit down 40c move in corn on report day, and that seemed to suck the life out of the recent bull market in grains.  

That was in spite of still adverse weather in SAM (South America), with still dry weather in Argentina and southern Brazil. In the past few days, those forecasts have taken a turn for the wetter, with the best chances of precip in Argentina in about 6 weeks in the next 14 day forecast. That should alleviate some of the crop stress on the SAM crop, and held to stem further yield potential losses for now. And if the rains turn out to be a true change in the weather pattern to a wetter/cooler weather pattern, we could actually see some crop forecasts recover from some of the more dire predictions for the SAM crop size.  

So the current state of the market is one which is not very friendly to crop prices or the crop trend: 1) We have a surprisingly large amount of stocks projected to be left at the end of this year IN SPITE of what was a disastrous US corn (-9% from trend yields) and US soybean (-5% from trend yields) crops. 2) SAM weather adversity might be ending for now - the one positive the market had going for it.  

Bottom Line: The bullish atmosphere we had going over the past 6 weeks may be ending. That puts the market susceptible to further losses in the next few weeks. Fortunately, we still have prices for Corn at near $6 for nearby months, and $5.50 for Dec 2012-Dec 2015 yet. These are acceptable price levels for most producers in spite of higher projected costs for 2012. But these price levels are quickly disintegrating, and producers are in a situation where they need to act now if they haven't as of yet in selling at these levels and above.  

To put that into perspective, not many producers have had an opportunity to sell at these price levels for 4 years out EVER in the history of farming! Perhaps 5-7 months total in world history have prices been at these levels. I know that many producers are indicating a fear of hedging at these price levels due to expected inflation in inputs. But if prices retreat significantly in the coming years, it will be difficult for input costs to continue to rise at the recent pace.  

But there is no doubt that one probably needs to match their production hedges with the amount of inputs they already have locked in for the coming years.  For example, most producers have already locked in most of their machinery line, their labor costs, and their land costs (certainly all owned land and some of the rented land). If that represents 70% of 2012 total expenses, 60% of 2013 expenses, and 50% of 2014 expenses, and only 30% of 2015 expenses then that producer should probably not hedge any more than those percentages (in order to use hedging to reduce risk, not increase it). Be careful how much you hedge out in future years, but for the most part hedging at least some of the 2012-2015 production (especially in corn) is going to be a prudent way to go.

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