"Sorting it all out, and getting ready"

As we finish celebrating Labor Day and get back to work, we find many items to sort through and put into perspective as to marketing ideas and strategies to use going into harvest. It is certainly no accident that lack of rainfall in areas that really need it has got to be at or near the top of the list, as producers in those areas report little to no rainfall for weeks if not months. Other folks in the Southern Regions are now harvesting some of their best crops ever. The most difficult decision of when to sell comes when your crop is burning up, but you hear about other areas that have good ones. Emotion can take over and a sense of disbelief can lead to no sales or downside protection taken, and then other factors take over to drive prices down. We have all been there and felt that pain as the market is a very big place that evens out the good and the bad to come up with an average. We examine our list to sort through below:

1) Dry August in the Midwest

2) Early harvest results in the south and Delta regions are excellent if not best ever.

3) Strength in the U.S. Dollar in relation to other currencies

4) Good weather (so far) in other major grain producing countries

5) Potential military action against Syria

6) Will the Fed begin "tapering", or in other words slow down the "monetary easing"?

First, the weather has been very dry on average in the midwest, but that is not a very well kept secret. What we dont know is how much yields have been affected. Our producers report that on average, corn yield will still be good overall, but beans are really a question mark, if not a developing disaster, and at 6:55 am on Tuesday, September 3, we are 45 cents higher in November beans. Obviously we did not get that crop saving rain over most of the Midwest that we needed. We need to watch today and this week to see if we can take out last weeks high of $14.09 1/2 which nearly equaled the contract high of $14.10 almost a year ago. Last week we made the high early in the week, then sold off from there. Is this a selling opportunity if we cant take that level out? If bullish news cannot drive us to new highs in either corn or beans, are we done for now? We have to ask ourselves if funds will come in and continue to drive prices higher, or not. End users wont, as harvest is at hand, and basis improvement may be enough to get early needs filled. What about November and December if harvest moves quickly?

Last week, December corn made its high early in the week as well, only to sell off later as early harvest picked up in the Delta. Barges loaded with new crop corn are now going UP the Mississippi River to places like Clinton Iowa. While corn yields in dry areas have certainly been lowered, the question is, how much lower? Again, we will have that debate over and over untill the combines roll all the way through the corn belt. It is ironic that last year, the early results in actual harvest yields were awful to say the least, and as we moved North, later on, we found some really incredible yields. Will this year be the exact opposite, where early reports are the best and we go downhill from there?

As always, we choose not to try to answer questions we dont have the facts to back up. It would be very easy to build an emotional case for both bulls and bears, but we have the marketplace to sort out those cases, and come up with a price at the end of the day. What we have to do is look at our bottom line, evaluate our risk and risk tolerance, and choose a course of action that makes us profitable. It is not too early to be looking at pricing opportunity for 2014 crops as well when we do that. Here are some of the factors we are looking at in balancing our thoughts of little rain verses some potentially bearish ideas as well:

1) Competitive world grain prices make us (U.S.) the most expensive grain to buy

2) The Middle East is a powder keg, what happens if it blows?

3) South America is gearing up to plant, and the corn/bean price ratio is screaming "plant beans!"

4) Logistical concerns remain in S.A. Can they ship what they grow?

5) Will large new crop purchases from us by China actually be shipped if Brazil can?

With the run up in prices today, we still like owning puts on unprotected bushels now, and especially when we are at the high end of the recent range. No one knows how it will all shake out, but looking at our bottom line, our profitability looks better today for both old and new crop today verses last friday. The following three paragraphs are repeated from last month, as we still think the ideas are valid and worth consideration.

For those producers who do not have enough storage, or do not want to store it all, we also like the idea of buying puts now, say the Dec. 4.50 puts for 14 cents or less. If you own these, and are faced with the decision to pay 25-30 cents a bushel to store it at the elevator, it is a no-brainer to sell the corn and reown it on the board. The put options protect the downside, so your only risk is the value paid for the puts plus transaction costs.  For example, you buy 4.50 December puts today for 14 cents. On October 2 you are harvesting corn and the December futures are trading at $4.50. Commercial storage is 30 cents per bushel until January 1, and 3 cents a bushel per month after that. Instead of paying that bill, just sell the grain, and buy December futures. Your total risk is about 15 1/2 cents, and you dont have to worry about January 1, just set a target to take profit on the futures position. The key to this decision is basis, as a bad basis is something we cannot recover by reownership. If you are able to sell a good basis, then it works well. If basis is not acceptable, then this may not work as well. Each individual should do their homework on local basis and weigh the chances of that either improving or not. As prices fall, basis should improve, but not always. Conversely, if prices rally, basis tends to slip as more grain becomes available. Make sure you talk this over with us to make sure you are comfortable with those ideas.

We like owning puts for other reasons as well, as producers they put a floor in price, but also give us the opportunity to reown previous sales with more flexiblity than call options. If you are unsure of total production, but feel it may be larger than you might have thought, owning puts for those bushels and then being able to own futures against them gives you the ability to adjust your plan accordingly if production does exceed expectations. Making cash sales at these prices are not satisfying compared with the past few years, but those prices might be with us for a while. To be able to make those sales and still be "in the game" with limited risk is a much better option to us than simply filling the bin and hoping prices improve. From a risk management perspective, I like this approach, because if those puts expire worthless, that means that prices have not fallen, and 2014 prices have not likely fallen either. Those positives to me are worth the cost of the put, as net farm income will be better if my puts are not gaining in value. It is more about being able to deal with potential negative market reactions coming than positive surprises.

Another reason to own puts and be able to buy futures is if you are in an area of production problems. Lets say your yield potential is much lower than normal, and it is likely you will recieve an insurance payment. As prices fall, your potential payment grows, but what if it rallys? The value of that payment drops as price rallys, and it is the October average of December futures that determines that price to compare with the spring price of $5.65. It may be a good idea to own futures against your put to make sure you get that payment. Again, each individual case is different in relation to APH, policy coverage percent, and local conditions. Make sure you talk this over with your agent and us before using this idea. You need to be able to accurately assess production potential and do the math to see if it works. One point of emphasis needs to be made here, as there still seems to be a lot of confusion on coverage. If you have a revenue policy that covers you at the 80% level, you are guaranteed 80% of your APH mulitplied by $5.65, not every bushel you produce at $5.65. The revenue guarantee in the spring is then compared to your actual yield multiplied by the October average of the Decembers futures price. If that number is lower than the spring guarantee, that is your payment. Make sure you are clear on that and call your agent or us to verify those numbers.  

From  the technical side, we have the following numbers from our computer to consider: 

Dec.  Corn                Support                 Resistance

                                 4.73                       5.08                                                                4.45                       5.30

                                 4.23                       5.54

Nov. Beans               12.85                      14.10

                               12.15                      14.39                              

                               11.62                      15.04                 

In conclusion, while we sort out the news and watch the price discovery process unfold, we are excited to offer a new service. On the "home page" of our website, there is a tab in the upper right portion called "Sales and Profitability Tracker". This spreadsheet, developed by Peter Schram, is a great tool to evaluate marketing opportunities, and the net results of different strategies. Once you have your costs entered in, you can play "what if" by making sales at different levels, buying put options, even making sales and owning calls to defend the sales. It should make it easier, and less emotional, to look at reasonable price ranges and plan sales in advance. Take a look and call us for details on how to use it, and decide if this may work for you. We hope to spend the winter months making this a tool that helps reduce the uncertainty and emotion of marketing decisions. Call us for details to see if this tool might be usefull to you. Finally, remember that just because it doesnt rain much, markets do not have to rally. There are so many other factors at work right now, and one of them is money flow. If its not flowing in, rallys can be hard to come by. Keep that in mind as we close today and get crop conditions later this afternoon. As we get ready for harvest, try to save a few minutes to update your plan and keep in touch to change it as needed. We have two big reports this month, the 12th will be Crop Production and monthly Supply/Demand numbers, and on the 30th, the Quarterly Grain Stocks, which seems to be a big market mover. Call us well in advance for thoughts and ideas on how to position yourself to lower risk and be comfortable!

Important dates to remember:

September 12th Monthly Supply/Demand Report and Crop Production 

Weekly Export Sales every Thursday at 7:30 am

Export Inspections every Monday at !0:00 am

September  20th  Cattle on Feed

September 30th Quarterly Grain Stocks

Crop Progress and Conditions every Monday, 3:00 pm Central Time

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


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There is a substantial risk of loss when trading futures and options. The thoughts and opinions in this article are those of the author, and while believed to be correct, are not guaranteed as the the accuracy or timing of the content. Past performance is not indicativeof future results, and each individual should examine their own risk capital carefully before trading.