CFGAG News and Views      vol. 16
"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 the accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital carefully before trading."
So Now What?
As I write this, looking back on this growing season and the volatile market moves, it is very easy to do what we seem to do every year and in hindsight, find fault with many decisions made over the last 12 months. We focus on the poor corn on corn ground yields, lack of drainage tile, hear of reports where fungicide applications yielded an extra 20 bushels of corn per acre, and many others. I could go on and on with a wish list of things I could have done differently, such as sell all my beans at $10.00 per bushel instead of waiting, and dwell on what "could have been". Why did I start selling corn at $4.00? Why didn't I buy some calls? Why did we not see this rally coming? It is amazing how many well respected market analysts were telling us to sell not only this year but the next two years crops as well last summer, yet now are preaching that 7 or 8 dollar corn are right in front of us.
The bullish case is simply stated. Yields are going to drop further, even after the shock of the October report showing the most dramatic drop in corn yields  from a September report ever. Demand will not be rationed until we go much higher, as ethanol profit margins are still holding, and the Chinese seem to be on a mission to own every last soybean produced, and are said to be ready to buy large quantities of corn as well. The Black Sea region may see a second year of drought, and wheat may go through the roof as well. The dollar is weak, and likely to get weaker, as the Fed exercises quantitative easing, printing more money to stimulate the economy.
The rest of the story is not talked about much, but there are some items which could have a negative impact on prices as well:
1) How much of the above bullish story line is already priced in the market?
2) Will the election on tuesday shift Government policy on spending, taxes, and monetary policy?
3) Will the ethanol tax credits be extended past the January 1 deadline?
4) Will the Chinese government clamp down on specualtion? Will they allow their currency to float?
5) What if USDA does NOT lower yields, or finds more grain from the last two years? Or lowers feed demand?
As we have said so often, it becomes difficult to process all the "what ifs" and keep emotion out of a good marketing plan. Especially now with the shock of corn yields really coming up short of our expectations, as for years we have been convinced that our new genetics, and better farming practices would keep delivering higher yields evey year. It is very easy to slip into the funk of inaction, miss some real opportunities, and look back and kick ourselves again. Enough depressing thoughts, lets look at what we can do.
For grain sold on the futures market or HTA contracts, we need to focus on the spreads and basis. Already we are hearing of some dramatic inprovements in basis in some areas, and where yields fell short, we should see more of that. Commercial contacts I have spoken to indicate there is a pretty good book on for January/February, and we may not see much opportunity there. It may come in last half November and December, so check your bids, see what rolling to March will net you after transaction costs, and analyze the basis opportunities. If we are going to run out of corn, July is the month of rationing, so bids for May through July could be attractive. All this is predicated on future USDA reports lowering yield and carryout, so pay particular attention to November 9, and the market reaction to the numbers.
If you have unsold, unprotected bushels in storage, and are bullish, put options ahead of this report could be a good investment to help make sure this "treat" is not suddenly taken away. I remember well the summer of 2008, and the clamor that corn was going to $10.00, beans to 20 and wheat to 15. Hmmm........ enough said. We feel that protecting profits are the most important thing we do, and are quite willing to let others chase the emotion of the day. As one producer told me last week, "I am trained to sell $6 corn, not buy it." Enough said.
Others that have sold a large portion of this years crop and want to reown it, there are many ways to do that and limit risk exposure, and we will be happy to go over those with you on an individual basis. Generally speaking, owning calls or buying a put and then buying futures against it are two that will limit risk exposure to the cost of the option plus transaction costs.Again, call us for specific ideas as they apply to your wants and needs.
Above all, avoid the emotion of bailing out of hedges and not protecting the grain. If you have lost money in your hedge account, don't let the value of your cash grain go down after lifting hedges. At least own puts and accept the risk of the premium to make sure a repeat of 2007/2008 rise and fall does not find you on the wrong end. I can still read the figures of how much hedge funds lost in 2008 owning all those commodities, and their total postions in the markets now are larger than they were then. Enough said.
In conclusion, as we enter the month of Thanksgiving, we also look back and give thanks. A beautiful harvest season, great weather, and some great prices. We are very blessed even if some yields were not what we hoped for, God willing, we will get another chance next year and have a lot more field preparation done in advance. We thank you for allowing us to be involved in your business, and pray for each of you to enjoy your family, your profession, and your contribution to feed the world. No other nation can produce what we do thanks to the work ethic of farmers and ranchers. And dont forget to vote on Tuesday. It is said that over 3 billion dollars will be spent on this election, but no matter what is spent, you have the power and freedom to enter the voting booth, and do as YOU see fit. For this right alone, paid for by many gone before us and those continuing to serve, we give Thanks!
Mike Daube    888-391-6330
Allen Gard     800-205-1700
Ron Reed      877-304-2460