CFGAG News and Views Vol. 6   Jan. 1, 2010

"There is a risk of loss when 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 as to accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital before trading. "
"Happy New Year"
As 2009 draws to a close, we will all remember two words........cold and wet. For most producers, the weather created lots of challenges, a very big drying bill for corn this fall, but overall a good crop and in some cases, records. On January 12, we will get the final numbers from USDA on 2009 production, and set the tone for trading in the winter with projected carry out supplies reflected in the monthly supply/demand report. This report has been a "market mover" in the past, and could easily be one this year. Major questions traders are asking include:
1) Will the bean production number go up?
2) Will corn yield go down due to late harvest, quality and test weight?
3) South America production........a record this year? How will this affect carry out supplies
4) Will the numbers indicate we need a "battle for acres" to satisfy demand?
If I had to guess, and it would only be a guess, the answers would be yes, not much, yes, and probably not. I would not be surprised if USDA brought out a 45 bpa bean number, and even with low test weight and other problems, most of the corn acres I work with had above to much above expected yields. As of this writing today,  a major weather forcaster wrote in his daily forcast this morning that he could not remember a year when conditions were so good in all areas of South America, and while there was still time for problems to develop, the time for them to be a factor is shrinking. A "battle for acres" could come from much lower prices, and we only have to look back one year to see what "could" happen. In early January 2009 the markets failed and dropped quite a bit. Are we looking at the same potential this year?
One way to manage price risk for unpriced grain in storage is buying put options with the least amount of time value in the premium. For the January 12th report, we can use February options, and only hold them through the report. Sometimes spending a few cents on these can really ease the mind. It is important to remember that when you buy an option, you are not committed to holding it to expiration. You can sell it back,  roll it to another month, or roll to a different strike. For instance, at this writing we could buy a February $10.00 bean put for 13 1/2 cents. That option expires on 1/22/10. A producer with beans in the bin could protect a $10 futures price for 3 1/2 weeks for 13 1/2 cents. If the report is bullish, and the market rallies, his beans will be worth much more and he will lose some of his option premium. If the market fails, and drops a dollar for instance, the producer would have the option to roll the put down and collect the difference, exercise the put into a short March futures position, or just sell it and collect the entire profit. There are many choices, and unfortunately some go unexplored. Call us for specific ideas on how to use these tools to do what you want in terms of risk management.
Our focus here as the new year begins is one of planning. We like to use the winter months to do our marketing plan, work with our crop insurance agent, and develop a strategy that gets our net farm income to a level we like. Laying off risk costs money, and we have found that spending some time with a good insurance agent that has a good software program can make our decision making easy. By combining the marketing with insurance purchase, we know exactly what our guarantee is and what we need to do with marketing to make sure our income goals are met. We can see clearly what the purchase of different insurance products means in dollars and cents to the bottom line, and we can also see what different market prices mean in terms of dollars per acre for our farm. Our philosophy here is not to tell people what they need to do, but provide information to that producer to help him or her accomplish their goals. Everyone has a different risk tolerance level, and there are insurance and marketing products available to combine together a solid plan. It just takes a bit of your time. I know at my office here in Indiana, the first 2 1/2 months of the new year will see many folks come in to sit down with myself and my favorite insurance agency to plan and project, and then take their plans to the bank for funding. After years of doing this, I know the banker really appreciates this process, and is glad to take part in it. In reality, it makes his job much easier when he goes to loan committee, because the risk is identified, and plans are in place to protect the producer from unacceptable risk.
If you want some assistance in the planning process, or need to find an insurance agency that provides the software products mentioned earlier in this article, call us. We dont have all the answers, and we wont pretend to. We will find information that helps you make an informed decision, and we will try to help you accomplish what you want. The market volatility can make you crazy at times, but having a solid plan put together in the "non emotional" winter months can be very useful when the heat gets turned up and emotions run high. The most important two things to know are:
1) What you want
2) What you need
If we know these two things, it becomes very easy to lay out marketing tool choices for you to decide on. Let us know if we can provide any or all of these things for your consideration.
We bring in the new year with great hope and anticipation. Heres to healthy and happy one, to all of you and your family.
Mike Daube    888-391-6330
Allen Gard      800-205-1700
Ron Reed       877-304-2460