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CFGAG News and Views vol 8 March 1, 2010 "There is a risk of loss when trading futures and options. The thoughts and opinions expressed in this article are those of the author, and while believed to be correct, are not guaranteed as to accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital before trading." Spring coming??? As we compose this article at the end of February for publication March 1, the snow is blowing, roads are drifting, and the low temperature here tonight will be near single digits. Spring you say? However, as we all know, some day soon the sun will be out, the temps will rise, and we will all be getting the planter set. That is why we lead this months edition with some caution: watch those grain bins. We all have heard horror stories of how fast grain can go out of condition. With plenty of corn available now, we don't need the added pressure of panic selling of damaged grain to compound our cash flows. We have plenty of re-ownership plans to use instead of dealing with that mess. For instance, if basis is decent now, and there is concern of quality issues, consider selling the grain, owning May puts on rallies, and buying May futures on breaks. If you get the futures on at the strike price, your maximum risk is the put premium paid plus transaction costs. As of this writing, May 3.70 puts are 10 5/8 cents, if those were purchased at that price, and the futures bought on a pull back to 3.70, your total cost would be less than 15 cents to get this on. For 15 cents, I would rather have the grain moved, (no more downside risk on price or quality) and I can capitalize on rallies until the May options expire on April 23. That gets me through the March 31 Prospective Plantings and Quarterly Grain Stocks reports, and well into the start of planting. If we have weather issues, unexpected demand, or just plain old money flow in from speculators, this could be a nice play. If the worst happens, deflation takes over and selling overwhelms demand, the most I could lose is my original 15 cents. Would that be better than holding grain with the aforementioned risks? Call us with specifics on that and other ideas. The month of March is well known for change. Weather, winds, and trader attitudes change often and will likely do so again. Remember the January report? USDA said they would "resurvey" those states that had acres yet to harvest, and that report along with the monthly Supply/Demand (WASDE) report will be out March 10. The explanation we read in January was USDA treated the unharvested acres as "stored on farm". Could there be adjustments? Sure........either way. Were significant bushels lost or found? Or was there no change at all? It really won't matter. What will matter is what the trade is expecting, as we saw on Jan 12. The trade was bullish, and when the numbers were not, the market collapsed the limit. In reality, a 1.75 billion carryout is not that much in today's demand structure. When analyzing your risks ahead of these report days, try to get a handle on what the trade is expecting, then ask yourself.... how you feel about it. Do you have protection or sales on in case of a major surprise? What is your plan after the report? A little thought ahead, a phone call to your broker, and perhaps a little insurance with some low cost options may make your nights sleep a little better. On March 31, we get the big report that sets the table for the planting season. It looks like our spring insurance price will be near 3.98 for corn, and 9.22 for soybeans, so we can now do the math with our insurance agent, and get some solid numbers in terms of dollars per acre to base our price decisions on. Remember, the more bushels you sell ABOVE the insurance price, the higher your actual guarantee is in terms of $/a. We are often asked for selling ideas, so here is one that has worked for some of my clients. As always I ask for 1) what they want, and 2) what they need. If we begin selling in increments above what we need for a bare bones profit target, and continue to sell rallies above that level, we arrive at a good average price. What about the unsold bushels in case the market crashes? Good question, the answer is stops. For example, one idea is to begin selling Dec 2010 futures at $4.10. Lets say we have 50,000 bushels of corn to price. We start by selling 10,000 bushels at 4.10, and then place a sell stop at $4.00 for 40,000 bushels. This gets us all sold above the insurance price if hit immediately, and not exactly what we were hoping for, but at least we got 4 bucks. If instead the market rallies another 10 cents, we sell another 10,000 bushels at $4.20, and raise the stop to 4.10 on 30,000 bushels. This way, if the market keeps rallying, you keep selling a portion of your production higher, raising the average, and also raising the stop on less unsold bushels. Structure sales, keeping in mind all the items we have talked about before such as cash flow needs, storage availability, and risk tolerance. By visiting with us, you can use any portion of the above with any of the tools such as futures, options, HTA contracts and others to create a plan and execute it. Most producers do not like to sell too many cash bushels until crop size is known, but futures, options, and spreads can help you get the job done as well. Make sure you plan a budget to account for any futures or option plans, as a great plan, unfunded, is disaster in the works. As we get nearer the last half of March, make sure option desires are known to us, as often the week before this report, volatility pushes option premium up. Simply said, those who wait until the last minute will pay the price. Literally. Going into this month, we have, as usual, a list of questions on issues that will affect market price, (or trader expectations of that price) going forward. They include: 1) March 10 WASDE and the resurvey results. Will carry out go up or down? 2 South American harvest progress and sales pace. Can they ship what they grow? How fast will they sell? 3) Weather developments and planting outlook. Are we flooded, frozen, or still knee deep in snow? 4) Changes in demand outlook. Exports getting better or worse? Are we still feeding wheat? 5) How many total acres will be planted to corn and beans with lots less wheat acres now? (trader expectations again) 6) As always watch "outside" markets (crude, gold, dollar index, stocks, etc.) An acceleration or collapse in those markets may have a large influence on the grain markets
Also, remember that March 15 is crop insurance deadline, and we are available to help with ideas that have worked well together in terms of combining insurance guarantees and market prices. Enjoy the "change of season" when it finally gets here, and remember the words of my wise old neighbor. "Another week of this global warming and Im gonna be frozen stiff". As always thank you for your business and interest. Please call us with any questions or ideas. Mike Daube 888-391-6330 |
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