CFGAG News and Views vol. 2

"There is a risk of loss in trading futures and options. The thoughts and opinions expressed in this article are those of the author, and while believed to be correct, are not guaranteed at to accuracy or content. Past performance is not indicative of future results, and each individual should examine their level of risk capital before trading."
 
"Winding Down"
 
As we approach September, it is easy to look back with disgust at missed market opportunities. The August 12 report didnt really change corn acres much, but did increase yield to 159.5 which gives us a large new crop to add to this years carry out. The surprise to some was the increase in demand projections, which leaves next years carryout almost the same. The bean numbers remain tight, so weather in the month of August, as usual, becomes the major factor in final bean yields. If you look at the soil moisture maps, its hard to find any major producing area that is short of moisture at the end of the most critical month. From these price levels, we still see substantial downside risk, but fully respect the idea that an early end to the growing season could light some bullish fires. Lets look at a partial list of potential market movers;
 
Bullish                                                       Bearish
 
Crop maturity                                              Weather forcasts still no threat
China demand for beans                                 China auctions of beans, possible subsidy?
India monsoon weak                                      South America planting intentions
Corn demand                                               Possible big crop getting bigger
Ehanol profitability                                        Livestock production shrinking?
 
As we look at the list, the first thing that stands out is we have little or no control over any of the items listed. We can get lost in the information flow and trying to interpret it, or worse, using that information as an excuse not to sell. We prefer to avoid those traps, and focus on what we can control to some extent, as we prepare for harvest. In preparing for maximizing our opportunities, we need our best estimates of:
 
1) Crop size
2) Storage capacity
3) Cash flow needs
4) Amount of hedges, sales, and option positions
5) Local basis bids
 
To decide whether to sell or store, we need to look at "carry" in the market. "Carry" is simply the difference in price from the front month to a distant one, for example, March corn is about 12 cents higher than December, so there is 12 cents of "carry". In other words, the market is offering you 12 cents to hold your corn until March of next year. Figure your basis bids for now and then, add the carry and you can see if it will pay you to store the grain. Last year, for a point of reference, March corn reached 22 cents over December, July over 40 cents, so we are not at what we would term "full carry" yet, and we may not get back to those levels. If the crop is late or comes up short, or farmers dont sell anything, then the demand may keep the front months supported enough so we dont go there. The question is and will be, at what point will the selling come and where do you want to be in line at. Basis could vary widely from east to west this year, as the bigger crop estimates in the west combine with a more normal looking harvest date to provide less basis potential. In the east, just the opposite, as late crops combine with lower yield estimates. Make sure you stay aware of basis and your local markets, there can be some great opportunities to get in "front of the line" if you are willing to sell a good cash basis and reown on paper. As for beans, the November option is actually  higher than the May, so it would cost you money to store on top of the storage, interest and shrink that occurs. The market is telling us to sell the beans now, and if you think they are too cheap,  reown them with some futures or options. For specific ideas that apply to your opperation, call us.
 
Put options that were purchased when prices were higher are also on the list. You may want to "roll them down" if you are bullish for whatever reason. If bearish, you may want to roll them to a more distant month to maintain protection until basis improves. Rolling options should fit your marketing plan, and not necessarily someone else's vision. You buy puts for protection, like insurance. The purchase of a put is not a cash sale, just a floor. You decide how long you need the insurance, and how much risk you can afford. Use the option for protection as long as you need, but dont pay extra for what you dont need. Again, call us for specific ideas that apply to options. 
 
.From a technical standpoint, here are some possible objectives that are derived solely from mathmatical calculations based on chart formations. One should only look at these knowing that these numbers are subject  to change on a daily basis, and are subject to the interpretation of the person reading the chart. Using the weekly chart, corn targets to the upside are 389, 403, and 427. Downside targets are 280, 265, and 242. Short term objectives for the upside in December corn are 347, 353, and 364. Down side are 301, 295, and 285. On the beans, weekly upper objectives are 11.66, 11.99, and 12.52. Weekly downside targets are 9.22, 8.90, and 8.36. On the November daily, short term upper objectives are 10.26, 10.33, and 10.43 with downside objectives of 9.22, 8.90, and 8.36 Longer term objectives to the upside are 11.36, 11.80, and 12.49 while downside objectives are 8.09, 7.65, and 6.94. Again, these are technical points, and for a more detailed explation on how we use these, call us. We use these numbers as part of the planning process, and do not "bet the farm" on only one part of that process. Our most important number is what makes you profitable. Period. We like to start with those numbers and work on possibilities from there.
 
 
The most important part of marketing is the plan. It takes a lot of emotion out of decision making to have one, and this fall is really shaping up as one to have your ducks in a row. We know the bean/corn price ratio is heavily slanted towards beans right now, if you were growing crops in South America, it is screaming beans. Look to the future, as it is a futures market. Will corn prices rally, or beans fall or some combination of the two? Will USDA numbers hold up? Will big crops get bigger? Will the world and domestic economies recover? I could go on, but as said earlier, the information flow can be huge and just as confusing.........decide what you want, what you need, and make a plan. We have many ideas for hedging as well as reownership that we use on our own farms. Call us for some exchange of ideas, but make sure you have an estimate of crop size, storage capacity, etc. Ideas are great, but need to be fitted to you. We will be happy to talk to you!
 
Keep it safe, and enjoy the blessings of the day!