CFGAG News and Views           vol. 27      October 1, 2011

"There is a risk of loss when trading futures and options. The thoughts and opionions 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."

"Ugly Day"

For many reasons, 9/30/11 was a very ugly day. After 7 straight days of rainy weather, a 40 mph wind from the northwest, and a bearish Quarterly Stocks Report. Corn down the new 40 cent limit, beans down over 50 cents. Add those numbers to the rest of September, and we have corn down $1.75/bushel, beans down $2.90, and wheat down $1.82. We certainly dont need to go any farther with the bad new, everyone is painfully aware that something went terribly wrong somewhere. As for the report, USDA "found" 160 million bushels of corn above the average trade guess. There are lots of ideas out there on how this happened, regular readers of this newsletter will remember that we felt last year that we had more corn and less beans on hand when the 2010 harvest season started, and yesterdays numbers seem to back that up. Too bad we cant go back and get a "do over". We can argue about new crop counted as old crop, etc., but the bottom line is we have more than we thought, as least for now. Psychologically, in 30 days, the market seems to have gone from euphoric bulls, to despondent bears. Early yield results seem to indicate on average, better than expected yields in some areas, and now the whispers are that national average yields will exceed 150 when a month ago, we heard whispering 145 or less. Where are the folks predicting $8-$9 corn and $16 beans now? Probably hiding in an undisclosed location, pretending they saw this coming a long time ago...........

So is it time to throw in the towel in disgust? Maybe, but we prefer to look at every market event as an opportunity to do something positive. We list the potential negatives first so we can move on to brighter thoughts:

1) More fund liquidation possible- there are still large spec. long positions in the market

2) Yield results for both corn and beans seem to indicate better than expected yields

3) China economic growth indicators could be slowing

4) European and US debt issues, bank exposures, etc., can still cause more liquidation, and money to the sidelines.

5) Demand destruction from $7.50 corn and a poor yield outlook effects can last a lot longer

Ok, enough of the bad news, lets look at some things that can turn around the slide in prices;

1) $1.75 drop in corn prices should have end users looking hard at some coverage.

2) Producers have sold some grain at record prices, will have more staying power.

3) Storage should not be a problem, there have been lots of bins built in the last 5-10 years

4) South America produced a huge crop last year, can they repeat it?

5) With the exception of poultry, the livestock industry has more black ink now to work with.

6) Will USDA cut the harvested acre number on October 12th?

We have to look back, and remember that since the insurance price of $6.01 was established in February, we only traded December corn below $6.00 briefly after the June 30 report. China became a buyer then, as well as other importing nations. We will see how anxious they are to "load the boat" now that we have returned. If they think they need it, or think they might need it, they will buy it, just look at the numbers of beans they bought from us last fall when Argentina weather was threatening. Did they take delivery of all they bought in the last marketing year? No, some were rolled into this year, but the bottom line is they controlled that inventory. It would not be surprising to see them do the same with corn. China is the 800lb gorilla in the room, and probably cause other end users to avoid being complacent. We have seen what happens to a producers bottom line when markets fall sharply, the same happens to end users on rallies. If you are an end user, and profitable, look at protecting those profits as well now.

As far as opportunities, the easiest to see is basis, the difference between the futures price and cash price. In Northern Indiana, at this writing we have a 20 cent OVER basis bid for the first half of October, when normal is 25-35 UNDER. What does 45-55 cent difference mean to your total income? While every area will be different, we urge you to look at local basis, and call us to help work out a plan. Cash sales at good basis along with a reownership plan on paper could be a good move right now. Our take now is simple, unless yields are a lot higher than expected, we expect producers to be tight holders, locking bin doors and waiting for some recovery. There is still downside risk in the futures market, as money flow will still be the driving force, but cash bids will reflect the local demand, and what they will be willing to pay. We have preached at length about the advantages of staying in control of your grain as long as possible, and this year could be a big payoff for that concept. Check multiple sources to see what the bids are and for what delivery period. If the futures market stays under pressure, November-December bids could get very interesting.

Another opportunity is your Crop Insurance. Did anyone expect to be in position for a payment due to price a month ago? It is time to make a call to your agent, go over your coverage with a good estimate of your production, and start doing the math. If December futures keep falling, these POTENTIAL payments get bigger. If you are in an area of very poor yields, the payment could be huge. This potential payment can be protected with a long futures or option position if waranted. For instance, say the market falls to $5 by the crop report on October 12th, and you have a large loss check coming. It may be prudent to "lock in" some of that payment by going long the market, as the only thing that could take it away is a rally in price. A little homework and a phone call can answer some questions and help make a good decision. Remember, it is the average price of December futures during the month of October, and we start computing that average on monday, October 3.

As we talked about last month, owning options were not a bad move considering the money on the table and profit levels. Did we see the big crash coming? No, we do not claim to know where the market will go, but we do try to use the moves to make some good decisions. If you did buy puts, say $7.00 December, you can "roll down" to a $6.00 put, pocket about 70 cents, and still be protected to the downside. If the market falls further, say to $5.00, and you want to own corn to protect a potential insurance payment, roll the put down, pocket the difference in price, and buy futures, as your put will protect the long futures postion, and insurance will cover the downside risk to your crop. This is hypothetical, only for illustration of an idea, and you need to talk this over with your insurance agent and broker at least, and probably your lender as well to make sure you have a well thought out plan of entry and exit, as the volatility in these markets can make a big difference every day if not hour or minute. Having your orders in with what you want to do has never been more important than now. Sunday night, daily limits expand to 60 cents for corn, and will continue that through the day session on monday, which means corn could trade in a range of $1.20 per bushel! It is difficult to take the time when harvest is going full bore, but considering the dollars involved, may justify a few minutes on the phone.

Looking ahead to the October 12 Supply/Demand and Crop Production Reports, there are a few items that will be looked at very closely. There has been talk all year about harvested acres being too high, and only in this report will we get numbers that should end that speculation. Conflicting ideas between FSA and NASS should be at least somewhat resolved. Along with acres, the yield forcast updates should have more actual yield information, a better overall handle on whats out there. And the bottom line will be projected carryout, a reflection of what we will produce, and what we will use up. This report could be the next "game changer", so if you need to update your plan of risk management from either the long or short side, be sure to call. November options will not carry much time value, but December options may be more usefull if more time is desired. Call us to compare the advantages and costs of each as they relate to your operation.

From  the technical side, we have the following numbers from our computer to consider:
Dec Corn                Support                 Resistance
                                 5.76                      6.50                                                                    
                                 5.41                      6.89
                                 5.06                      7.29

Nov Beans                 11.70                     12.81
                                11.18                     13.38

                                10.64                     13.96                               

In conclusion, the month of September has not been kind to our net farm income, but one month our of twelve does not make up a year's average. Prices at the elevator are still higher than a year ago today, and basis presents many opportunites as mentioned above. Instead of looking back, and wishing we had done more, we need to focus on what is ahead, and maximize our situation from here.  We have given the same message over and over that it really doesnt matter what someone else thinks or predicts, it is what each individual wants to achieve and how we can help them get there. This is a very emotional time in our world, with constant political bickering and concern over the debt issues and how to solve them. We can get caught up in negative emotionalism, or we can look at our opportunity to prosper. Take a minute to reflect on those, and if you need to talk over some ideas, be sure to call. Besides futures and options, we also have cash marketing programs available for those uncomfortable with those tools.  Have a safe and prosperous harvest, and watch that basis!

Mike Daube      888-391-6330
Allen Gard       800-205-1700