CFGAG News and Views  vol. 35      June 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."
"Is it Over for the Bulls? "  Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55
 To say the least, the month of May was not a good one for commodity prices. Look at the drop in corn, beans, crude oil, metals, and even the stock market took it on the chin in a big way. If anyone needed evidence of the effect of "money flow", and what happens when it flows "out" this past month put the exclamation point on the entire story. Investment money is nervous, as European debt issues, a struggling US economy, and concerns over a slow down in China all came together to pull money out and drive prices down. We would add that "money flow in" took beans to over $15.00 in old crop months, but it took a record fund long position to get them there. At some point, those that buy but do not use have to sell, and we are seeing that liquidation right now. So is it over? Funny how when prices are rising, the only news is bullish news, but now that we have fallen back, only the negative news seems to dominate. Sound familier? Right now we have to sort out the fact from the spin, and see how it looks in terms of our bottom line. We talk to many producers across the country, and can tell you the concern over this years crops is rising quickly. At this writing, the evening of May 31, it is now raining in Northern Indiana, something we have not seen in over 3 weeks. One rain in May untill now, and that was a 2 inch rain that came in 2 hours on May 7. Corn planted a couple days before had to be replanted, and is just now coming up. Overall population stands are a concern in many areas, as heavy rain, blight, and now "rootless corn" reports seem to be saying that just maybe, the "perfect" start to the planting season may now have a few chinks in the armour.
Soil moisture profiles have dropped dramatically, and according to the Drought Monitor Maps, 55% of the US growing area is under some level of drought. A lot of change in just 3 weeks. Weather forcasters are all over the board, with some looking for ridging to build in about a week, and more above normal temps, below normal precip. Others see a more generous moisture set up, and cooler trends as well as we go through June. As producers, it is increasingly frustrating to try and sort through the maze of information and advice, looking out the window at corn that needs to be replanted, and wonder why we just dropped 27 cents in July Corn that day. Simply put, the money flowed out of the market, and took price with it. The question is now, will those same funds put money back in, and when? Will they have a reason to, or are we cheap enough to inspire end users to cover needs now? Here are the questions we are looking to as we prepare for the monthly Supply/Demand Report on June 12, and the BIG report day of June 29 when we get our first look at Planted Acres, as well as the Quarterly Grain Stocks Report.
1) Will the warm and dry pattern persist?
2) Has the liquidation of July Corn and Bean contracts run its course?
3) Will fund managers continue to pull money out of commodities, or will they return after European concerns are eased?
4) Did we see any significant acre changes from corn to beans?
5) Will the recent dry weather discourage wheat producers from double cropping beans?
6) Has the rally in wheat caused end users to look for more corn for the feed bunk?
 In looking toward those report days, we cannot emphasize enough the importance of having a plan in place before we get there. One of our major concerns with the new 21 hour continuous trading days is that markets, as of now, will be open when these reports are released. While there are efforts to have trade suspended for an hour or so to digest these numbers, nothing has been announced yet. Therefore, make sure you are positioned carefully before that day, and also be wary of "over reaction" to the first release of the new numbers. There is a lot of concern over the possiblity of "whipsaw" market prices, and getting orders in and filled without error in panic situations will be difficult. As brokers, we try to get the best possible order execution for our clients, but this environment will not be the best to doing that. Make sure we have planned ahead, and know what you want to do well in advance of 7:30 am on report day. We will update this column if we get new developments on trade suspension, or other factors that may affect trading. In anticipation of the reports, we feel there is substantial risk for both producers and end users, as the possibility of a major "game changer" is there on both sides. Consider the following possibilities:
1) Corn acres come in bigger than the March Intentions, Stocks come in larger as well.
2) Less corn acres, more beans than March 30, and Stocks are "not there".
3) USDA last month decided to use some "new crop" to boost this years carryout. Has the weather and crop development since then been consistant with this view?
4) Will world numbers of corn, wheat, and beans be adjusted significantly up or down?
5) China import projections- up or down?
Needless to say, there will be a lot to digest and deal with, we hope that the "powers that be" give us some time to sort it our with markets not trading. We repeat, make sure you are comfortable with your position and risk management plan before we get there.
A recap of our positions and outlook: (repeated from last month)
1) We are essentially sold out of 2011 bushels, both corn and beans.
2) We are approaching 50% sold on 2012 beans, and are using option spreads to put floors in on the balence, creating a window up to $15.00 on November beans
3) We have little or no cash corn sold for this year, but have the 3 way option spread on protecting a $5.90- $5.95 floor basis September futures for at least half of our expected production. We would still advocate adding to that position, or making cash sales on any rally approaching $6.00, given what we know now.
As referenced, the option spread on corn, which was described in detail the last two issues of this newsletter, has been a good tool so far. It consisted of buying a September $6.00 put, and selling both a December $5.00 put and a December $7.00 call for a total cost of 5-10 cents. At this point in time, most producers we have with this on have rolled down the $6.00 September put to a $5.40 put for about forty cents. The other positions remain the same, but we want to remind you to review our management plan with these postions. We want to remove the risk of the sold options whenever the value left in them no longer is worth the potential gain to you to keep them on. Sold options are fine, they help pay the freight of owning protection, but as pointed out above, things can "change". Stay in touch and make sure we know when to lift those, or take profit by rolling down, or raise the floor by rolling up. Evey day has a new twist, so make sure we are ready to take advantage of "surprises". Some producers have elected to lift the short December $7.00 call option, and eliminate the associated risk. This may not be a bad idea as we approach these reports. Call us to go over these ideas soon.
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, 5/31/12    July:   $5.55 1/4                         September: $5.251/2                                   December:  $5.22
                            July put options:                              September put options:                                   December put options:
$6.50                                  96 1/2   cents                        $6.00      85 5/8 cents                                  $6.00          96 1/4 cents                      
$6.00                                  50 3/8   cents                        $5.50      47 3/8 cents                                  $5.50          59 3/4 cents
                                                                                     $5.00      19 5/8 cents                                  $5.00          31 1/4 cents

From  the technical side, we have the following numbers from our computer to consider:
July  Corn                Support                 Resistance
                                 5.52                      5.95
                                 5.28                      6.16
                                 5.04                      6.30
                                 4.54                      6.51

July Beans                 13.12                     13.90
                                12.52                     14.13                               
                                11.82                     14.36
                                10.94                     14.67
In conclusion,  we have new trading hours, and new challenges to deal with. We want to make sure you know that you can call us at anytime you need to. We have IPADS now, our office phones will transfer to our cell phones, and we can execute orders just about anytime that is needed just about anywhere. Do not hesitate to call, thats why we are here, to provide the best possible service we can. As crops get planted, side dressed, sprayed, and all the other vital proceedures needed to maximize yield, please take a few minutes to make sure you have your risk assessed and planned for, and we know what you want and need from us to "git-er-done", and maximize your profits. There is plenty of reason to worry, whether you are growing the crop to sell, or buying the crop to use. Making sure you have those risks covered that you dont want to worry about can make it a lot easier. Keeping in touch keeps us from worrying about YOU!
Important dates to remember:
 June 12th Supply/Demand Report, and Crop Production
Weekly Export Sales every Thursday
Export Inspections every Monday
June 22  Cattle on Feed
Crop Progress every Monday, 3:00 pm Cental Time
June 29: Planted Acreage, Quarterly Grain Stocks, Hogs and Pigs

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