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Multiple-year hedges recommended

The USDA will update their long range U.S. crop projections this week. Any changes from the November time frame will be made when they put together the Feb. 13 released numbers and this week when they release them to the press in the Annual Ag Outlook extravaganza.

Long range forecasts put out by USDA Feb. 13 indicate a significant decline in price averages for grains in 2012/13.  That includes a drop in corn price from $6.70 this year to $5 next year and $4.30 in 2013/14. Wheat prices drop from $7.40 this year to $6 next year and $5.75 the following year. Soybeans drop from $12.60 this year to $11 next year, and to $10.30 in 2013/14.  

Thereafter, prices recover somewhat. But, that highlights the fact that current high prices might be an anomaly, and prices aren't likely to stay there for long.  These drops are precipitated by a return to 'normal' stocks levels for corn of 1.623 mb next year, with a recovery of yield to 'trend' and a 2 million acre hike in acreage (actually that is smaller than most private estimates).  

Actually, Pro Ag expects even more bearish numbers to be released in this week's update.  First of all, the November estimates used only a 2 million acre hike in planted acreage of US crops in 2012.  Actually, Pro Ag expectations are about 11 million acres (about 9 million less PP acreage in the Dakotas, MN, and MT) and another 2 million of 

pasture/broken up ground.  That hike in acreage should be spread out over corn, soybeans, and other spring planted crops as obviously the additional acreage needs to go somewhere.  In addition, the soybean carryout number has grown by about 80 mb since the Nov report (the carry-in number), and that is going to pressure grains once that information is known by all.  

As we've said before, this is exactly the reason Pro Ag has been encouraging hefty hedges of corn, soybeans, and wheat in multiple year hedges.  The outlook is for a response of larger supplies and a cut in demand due to recent high prices, as we go forward in the next few years.  

The only thing that could derail this projection is another poor crop year (like the US suffered in 2011, with corn -9% from trend yields and soybeans -5%).  But the likelihood of that happening might be slim (10% or less?).  

That encourages aggressive sales of grains at current price levels.  

That's why Pro Ag has recommended aggressive sales of 2012-2015 crops as it's likely these price levels will slowly erode over the coming 6-12 months, especially if the production season of 2012 turns out to be better than expected.  With trend yields, corn should yield a new record large 164 bu/acre in 2012, with a resulting 14.235 billion bushel crop that should result in a 1.623 billion bushel carryout.  That will be double the current projected carryout! That pressures prices in 2012 to the $5 level - about $1.70 below the current years projected prices.  


Soybean production is also expected to rebound in 2012 to more 'normal' trend yields of 44 bu/acre, well above the 2011 crop yield of only 41.3 bu/acre.  The rebound in soybean production will mean a 3.215 billion bushel soybeans crop, well above 2011's 3.046 billion bu crop in spite of a loss of 1 million acres in planted acreage (mostly lost to corn).  That will leave a carryout of 209 million bushels in their projections, but when updated in late February will be hiked to higher levels as the Nov. projections included beginning stocks of only 195 mb, and already USDA has hiked that number in the past few reports to 275 million bu (in spite of smaller SAM crop projections).  One gets the feeling that world production is expanding at a time when demand is shrinking! That is not a good prescription for the long term outlook in grains.  

Expect pressure on distant futures with the release of the USDA Annual Ag Outlook report on Thursday/Friday, especially the 2012-2015 crop years for corn, soybeans, and wheat.       


The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. 

The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.

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