CFGAG News and Views           vol. 33      April 1, 2012

"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."

"The Cards are Dealt, Now its WEATHER! "  Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55

Yet another "surprise" from USDA on March 30, for the first time in many reports, we did NOT find a bunch of extra corn in the  Quarterly Stocks Report. The actual number was almost 150 million bushels LESS than the average guess, and certainly not what the trade had been looking for, as corn traded up sharply on the open, and then closed limit up in the May contract. The Prospective Plantings number was a lot higher than pre report guesses, but perhaps we had been expecting this anyway, as new crop closed up 16 cents on the day. Bean stocks were pretty much as anticipated, but anticipated acres were much below the average guess, coming in at 73.9 million acres, implying anything short of a good yield will require rationing until South American Farmers can try to make up the difference. All these "facts" are now on the table, and we can sort through them and see what we should look for in the coming weeks.

As we have said many times before, it is not necessarily the numbers, but what the market is trading going into a major report. It was almost comical to read and listen to various commentary last week, as it seemed that fear and emotion over the last few stocks reports dominated the corn market. We heard over and over how corn had closed limit down the day of the last few reports, and one could sure see the selling of corn and buying of beans the last few weeks. So once the numbers were out, it was clear that end users looking for a bargain from the release of the numbers were not going to be rewarded this time. Old crop bean stocks were as anticipated, but with new crop acres so low, could they afford "not" to buy beans as well? In digesting all this new information, we ask some questions, then look for price action this week for some answers.

1) Since the March 1 Survey, did the rally in beans, (over $1.00/bushel) sway some farmers into more beans acres?

2) USDA still has some math issues with total acres, (4-5 million could still be added) What, if any, crop will those acres go to?

3) Can we expect maximum double crop acres with the wheat crop development ahead of schedual?

4) At what price will rationing take place in corn and beans?

5) Will funds, already record long in beans, add more investment, or throttle back into some other commodity, or move into equities?

Again, it comes down to weather for much of the answer. We have seen record warmth this early spring, and now looking into mid April, it looks like a cooler/wetter pattern could develop. With much of the corn belt on the dry side, it would seem that some moisture would be welcome, but as Grandpa used to say, "plant your grain in the dust and the bins will bust", implying a dry spring is more desireable than mudding in a crop. We can only wait and see. Some planting has already taken place, but normally the bulk of the corn crop likes to go in mid April-mid May. These next few forcasts, with or without the threat of frost, will certainly implact the market. Out next set of quetions deal with money flow, and as we have witnessed every day, money flow into or out of the grain markets is still the most dominating force to be dealt with.

1) Will a potential frost event cause funds to buy back big short positions in the wheat market?

2) How much spreading has taken place, either long beans/short corn, or long beans/short wheat?

3) Are there more warning signs in Europe? Debt issues are still there, although quiet lately.

4) Are there concerns with China, in terms of growth, and a potential housing bubble?

5) Are there indications of Europe moving into recession, and what are the impacts of continued economic growth issues?

6) Gasoline prices are extremely high, and demand is the lowest in years. What are the impacts to the ethanol industry, and the US Economy as well?

While all these questions and more lead to a lot of antacid consumption and headaches, there is still one important factor that we look at, net farm income. It is not our desire to overload the brain cells with constant questioning of our global market place, but simply ask with all the hype and spin of daily news, what is really important? Do we have prices that justfy some sales? Do these prices equate to profit if sales are made or option protection purchased? Each individual must make this call, and go with the intuition that has been developed over the years. If $13.00 plus beans equal a profit that is acceptable, then something needs to be done. If old crop corn is still plentiful on your farm, and you were just sick over the last few weeks of sell-offs, then what is the price that you will accept now? A limit up move on friday may or may not mean a thing on the following monday. When we look back over the last 15 months, we can see that so far, the market is willing to buy corn near $6.00, but moves above the $6.50-$6.70 area are limited. Yes, weather will impact prices, but what is the makeup of the market, and can we inspire funds to buy old crop corn now? Will China buy old crop or new, or none at all?

What to do? As producers ourselves, we have always told our clients that we would tell them what we are doing and why. For me personally, I am now nearly 50% sold on new beans, and sold out on old crop. I say "nearly" 50%, as I am considering switching some corn acres to beans, and get nearer a 50/50 rotation. If I do switch some acres, those bushels will be sold, period. It would be irresponsible of me to assume that the price will be the same or higher just because I switched. The market is apparently trying to buy some beans acres, and if it gets them, or even thinks it has them, then there is no reason to push prices higher. I produce the crop, and potentially take a lot less for doing so by not protecting that price.

For corn, we outlined a 3 way option spread in the last issue, and we feel very comfortable with this position at this time. We repeat this segment now, and the reasons/management plan associated with it.

Since the September contract is trading more than 30 cents higher than December at this writing, and with last years chart to go by, we see that September at expiration last year was trading a 17 cents LESS than December. With a potential earlier start to planting, we feel September could easily become more of a new crop month. Therefore, to capture that inverse, as well as sell some time value to pay for time value, we look at the following:

Buy September $6.00 put

Sell December  $5.00 put  (roughly corresponds with price that crop insurance kicks in, be sure to check this with your agent)

Sell December $7.00 call  (a price that I would be happy to sell my cash corn, yours may be different)

These are just examples, you may want to use other strikes, but this spread could be put on Feb. 29th for 10 cents cost.

Managing this position requires first some margin on the short call position, and then a plan to deal with market moves beyond what we anticipate today. We feel that if December corn exceeds $6.50, we need to sell some cash corn and/or own a July call option to reduce margin pressure. Also, if the front month of corn takes out a low around 5.70, then increased downside protection may be needed. If the market chops inside those ranges, we simply let time value decay the value of the options sold, and look to buy back the December put on a rally in the upper end of the range, and buy back the short call on a down move. This will leave us with a floor price of $5.90 in the September, less any amount we have to pay to pick up the options sold. A two dollar window to sell cash corn in, as you feel comfortable, and a protective floor under you at what should be a profitable price as we head to the end of March. Be sure to call us to make sure you fully understand the execution and management plan we used as an example. These are only tools, and they should be shaped to fit what you want and are comfortable with, and only by spending some time and playing "what if" with some numbers can we get to a comfortable position for you.

At this date, April 1, the Sep/Dec spread has come in over 10 cents since this position was put on. Any move by September futures to the $6.00 level will get us to add to the postions we have now. For old crop corn, we still are trading a range, and would sell cash corn at $6.50 or better. Unless something changes the landscape, adequet supplies of wheat should keep a lid on the corn market. Wheat has been a lid on corn, and corn a floor for wheat, and unless weather here or abroad changes, we anticipate more of the same generally speaking.

We started a new feature this year to help "track" some options and their premium cost. These are not recommendations, just examples of some strike prices with corresponding futures month prices. By looking at these every month, we should get a feel for time value decay, as well as some sense of volatility depending on price action. If you like this, or want more, let us know. You can always get updated information by calling us, but this should give us some historical reference to look back on through the year. With each newsletter archived, you can follow these price relationships all year long.

Futures close, 3/30/12    May: $6.44                                September: $5.63 1/4                                   December:  $5.40 1/4


                            May put options:                              September put options:                                   December put options:


$6.50                                20 1/2 cents                        $6.00      64 3/4 cents                                  $6.00          86 1/8 cents                     

$6.00                                  2 5/8 cents                        $5.50      35 3/8 cents                                  $5.50          53 3/8 cents

                                                                                  $5.00      15 5/8 cents                                  $5.00          28 3/8 cents

From  the technical side, we have the following numbers from our computer to consider:
July  Corn                Support                 Resistance
                                 6.26                      6.78                                                                    
                                 6.02                      7.04
                                 5.78                      7.32

                                 5.54                      7.58

July Beans                 14.03                     14.30

                                13.71                     14.60                               

                                13.12                     14.90

                                12.57                     15.52

In conclusion, with the numbers on the table, it is now the markets job to determine what price is needed to make sure we do not run out of anything, nor build up unwanted surpluses. I know that statement sounds quite frustratingly simple, but that is the function of free markets. Our problem as producers is to sort out all the information to make sound financial decisions, and that is not easy today. When prices can fluctuate as much as they can today compared with just 10-15 years ago, it can just make one crazy. Some days I just want to go out in the field and work, not worry and stew about every missed opportunity. The plain truth is no one can assimilate all the information quickly enough to take advantage of every price move, or be in the right spot every time for every report or news flash. We just have to decide what is profitable, how much we want to spend to protect a price, or if the market has given us enough of a profit goal to pull the trigger. I know all to well and painfully that I do not do well selling on a down market. I am much better at selling in increments on every rally. With an option floor under me, and selling above my crop insurance price, I am meeting my income goals as laid out in the winter. If that doesnt keep me in the business of production agriculture, then maybe I do need to do something else. If these,  or any other ideas you have make sense, give us a call to discuss different choices. They are your choices, and thank God we still have the ability and freedom to make them.

Important dates to remember:

April 10th Supply/Demand Report, and Crop Production

Weekly Export Sales every Thursday

April 20  Cattle on Feed, Cold Storage

Crop Progress every Monday, 3:00 pm Cental Time

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