CFGAG News and Views           vol. 36      July 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."

"Can You Believe It? "  Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55

What a difference a month can make, that is the understatement of the year so far. In last months issue, our number one thing to watch in the first list of questions was: "will the warm and dry pattern persist?" For many of us, it has, and caused some serious damage to potential corn yields. There is just too big an area that has received little or no rain the past 30 days, and early planted corn has entered the critical reproduction phase under severe stress. There is talk of corn fields being disked up, hoping for a rain to plant some late beans into. Not a good feeling at all. We could go on for hours relating the horror stories of crop conditions, but that is not going to help keep our focus on what is most important, protection of net farm income. If you look up at the top of this page, notice again the crop insurance prices set in the spring. At the moment of this writing, we are almost a dollar per bushel higher than that level on corn, now at $6.60, and beans have exceeded their spring price by $2.00 at $14.55. There are not prices to ignore unless you will have absolutely nothing to sell.

The much anticipated Planted Acres and Quarterly Grain Stocks Reports came out on June 29, and were for the first time in a long while a non event, as weather concerns were much more important than the reported numbers. Both corn and beans had higher planted acres, corn a few hundred thousand, and beans over 2 million, but looking at a potential of 5 million double crop acres in these drought conditions may be a stretch. USDA also gave us a harvested acre area of 99% on the beans, and that seems a bit optimistic as well, but we leave that for other analysts to worry about. Suffice it to say that weather concerns will trump about any news in Europe or US politics until we see more rain in the gauge and lower temperatures to go with it. We look ahead to the month of July with the following questions to consider:

1) Will the warm and dry pattern persist?

2) How many acres of corn are beyond help from rain?

3) Will fund managers jump into the corn market with both feet now?

4) How soon will we see direct evidence of serious demand destruction?

5) Will the double crop beans get planted at all?

There are a few "red flags" to point out as we continue this rally, things to keep in mind when considering sales:

1) Reports gathered in this office indicate very little cash corn has been sold for this years crop

2) Ethanol margins are not good. With crude oil trading near $80/barrel, it would seem corn upside is more limited than in past years

3) End user profitability is livestock, especially cattle looks negative, and worse when you look at pasture land burning up as well

4) Exports for corn remain slow as other sources, (South America and Ukraine) are cheaper 

A recap of our positions and outlook:

1) We are essentially sold out of 2011 bushels, both corn and beans.

2) We are about 50% sold in beans. We are starting to build option protection to the downside for the balence of this years production

3) We have begun selling increments of cash corn, starting at $6.00, and adding an increment on further rallys, or increased confidence of production levels

4) For those uncomfortable with cash sales at this time, options and option spreads like buying a Sept 6.30 put and selling a Dec 7.50 call for about a 7 cent cost provides a floor of about $6.20 including transaction costs.

Make sure you understand the risks associated with selling options, and have a management plan in place with us to deal with the volatility. The weather has provided a price opportunity that a month ago seemed like a crazy dream. Now we not only have corn and bean prices at the high end of anyones expectations, but 2013 corn prices are within 15 cents of $6.00. Call us for some ideas on protecting some of next years price as well.

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


                              September put options:                                   December put options:


$6.50                        $6.00      19       cents                                  $6.00          30 1/2 cents                     

$6.00                        $5.50        9 3/4 cents                                  $5.50          18 1/8 cents

                                $5.00       2        cents                                  $5.00           6 1/2 cents

From  the technical side, we have the following numbers from our computer to consider:
Dec.  Corn                Support                 Resistance
                                 6.04                      7.05
                                 5.51                      7.47

                                 4.56                      8.00                         

Nov. Beans                 13.89                    15.08

                                 13.15                    15.82                               

                                 12.40                    16.28

In conclusion,  we have witnessed weather markets before. They come and go quickly, and often leave us wondering, "why didnt I take advantage of that". The answer is simple, it is very difficult to watch your crops burn up, and try to sell anything. We watch as all our work, input costs, and profit potential blow away with the 95 degree heat, and 30 mph wind.  It is something those not involved in production agriculture do not understand, they only see their lawn turn brown, and complain about that. We have to remember, in spite of all the negative emotion that this is a "supply threat" rally, and once it is quantified, the damage assessed, we will look to demand to see what price they will pay. I am concerned that we are close to a price that has factored in a lot of the last month. End users must be able to buy our grain, and make a profit with it. Funds that buy corn futures, but do not use the corn, must re sell it. This month we will sort it all out, get many yield estimates, reports from the field, etc, but the most important thing to watch will be price action. At some point we reach a level that end users will not go above, the funds take profits, and we are wondering "why". History says around this time of year, markets turn, sometimes the reasons are obvious, sometimes we figure it out later, but there is risk this week, and if you need some ideas on managing it, give us a call. The markets stop trading at noon on Tuesday, July 3, and do not open until 9:30 am July 5. Celebrate our Nation's Birthday, and remember all those who shared the vision of Freedom and Liberty that has made us the Greatest Nation on earth, and we are PROUD to say so.

Important dates to remember:

  • July 11th Supply/Demand Report, and Crop Production
  • Weekly Export Sales every Thursday
  • Export Inspections every Monday
  • July 20  Cattle on Feed
  • Crop Progress every Monday, 3:00 pm Cental Time

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