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CGFAG News and Views vol 10 May 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 carefully before trading." "Fast Times in Ag Land" Amazing......thats how most of my clients describe the difference in soil conditions from last year to this one. Remember last year? Most of us had not planted one seed, this year, many farmers are done with corn and beans. The perception is that we will all grow record yields and prices will plummet, right? Maybe. It was only a few months ago that heavy snow pack, floods, and field after field of unharvested corn would delay planting indefinitely and we should be bullish. Now all is lost, there is no hope, throw in the towel, and feel bad because you didn't sell more. Right. Get on the emotional roller coaster so you sell more at the bottom and buy more at the top. If I had a nickel for every time some emotional "analyst" influenced someone to take some actions that were based on fear verses good planning and discipline, I would be quite wealthy. And just when you thought the market was doomed, here comes China for some CORN! We have many things to discuss this month, but this news is a possible game changer. It is important, as referenced above, to get the facts, put them into perspective, and look at your plan. Here are the "facts" as we know them at this writing: 1) China has purchased two cargos of corn for May shipment from the Pacific Northwest 2) This amounts to 115,000 metric tons, just under 5 million bushels. 3) There is "trade talk" the the actual amounts purchased are much larger, and they could buy up to 2 million metric tons 4) There is some doubt that this corn will even make it into China, because of import restrictions by the government. So how do we interpret this? We have often discussed market psychology as a major force impacting price, as it directly impacts money flow into and out of our markets. Remember last winter? Everyone was bullish going into the January report, money flowed in and we had good prices, then got a big surprise. We sold off, as money flowed out, and regular trading funds went from long 188,000 contracts to a net short position. The old saying of "follow the money" works here. Now, we have a potential turning point with the Chinese purchase, the start of a new month which many times sees new money coming into investments, and the bullish argument is alive and well. Our advice is predicated on the following points: 1) End users of corn are making money now. Livestock prices are very good. Last year no one was profitable 2) The Chinese purchase puts some added pressure on weather both here and in China for the next 6-8 weeks 3) We still have adequate supplies of all grains 4) South American crops are huge, and will be competitive for a long time to come 5) World economic troubles are still a potential downer The bottom line? We still think selling above the insurance price is a good idea. Many of you have crops off to a good start, and without a major weather problem, should have good production. The next 6-8 weeks is the key: if supply is threatened by weather, or demand is suddenly ramped up by Asian buying, we could go much higher. If world weather is conducive to good production, we may have some air under these prices. Most importantly, stick with a plan of profitability. There are many strategies to use, a long $4.00 put/short $5.00 call may come into play on a decent rally on weather, but these events usually dont last long. Make sure you have your orders in, as prices can come and go in a manner of minutes. A few days ago, the wheat market lost 30 cents in a couple minutes........it happens, and there is no way to take advantage unless the orders are in. Using stop orders can help as well, as in an incremental sales program. Suppose we rally to $4.10 December futures, and you have 50,000 bushels to sell, but think the market could work higher. Sell 10,000 at 4.10, and put a stop at 4.00 to sell 40,000. The next day we go to 4.20, so we sell another 10,000 bushels there, and move the stop for 30,000 bushels to 4.10 and so on. By the time we are sold out, our average looks pretty good, and once we started the process, we would be sold out at no less than 4.00 average. For those that want some upside protection, I would recommend the July 4.00 calls. Normally not a fan of calls, these are good until June 25, at which time we should know if weather will be a factor. If you have them on, your decision to sell a weather rally may be made easier, because if the market should go sharply higher, you can participate in the rally for a relatively small investment. Call us to discuss these and other ideas on managing this development. On the beans, I want to cover what I think is a real threat to income this fall, and that is basis risk. I have been surprised by the bean market and its ability (so far) to maintain a relatively high price in the face what seem to be bearish fundamentals. What I am concerned about now is fall basis if we produce a good yielding crop. South America could be shipping beans at maximum capacity right through our harvest. While it seems like the bean price can never break, it still could, and we could have a situation with low price and very weak basis at harvest. I am a producer that likes to move beans at harvest and store corn, and this year may be a very good year to do just that, but being proactive and locking in some basis may be more important. See if this list makes sense to you: 1) Good planting weather means more acres of corn and beans than the March 31 report indicated 2) Prices are good enough to encourage the same 3) Brazil and Argentina are behind a "normal" sales pace with crop size much above normal 4) World demand is good right now, but with debt problems increasing, there is a dark cloud on the radar. This is enough for me to have all beans protected at this time, and a substantial portion with basis set. Remember, we can re own beans and recover futures price if possible, we cannot recover a bad basis. Be sure to check your preferred delivery points for basis and expectations for fall. If weather is good, dont be surprised to see fall basis slip as supplies both here and down south are more than adequate, with world carryout now well over 60 million metric tons. On the technical side, we are watching the following numbers for possible sales/reownership Support Resistance July Corn 3.63 3.83 3.57 3.89 3.51 3.98 December Corn 3,67 4.05 3.57 4.12 3.50 4.22 July Beans 9.70 10.51 9.56 10.70 9.38 11.01 November Beans 9.37 10.15 9.23 10.34 9.06 10.60 Again, we have a great start to 2010 crop season, but Grandpa always reminded me, it is never as good as you think, or as bad as you think. Looking back, he was exactly right......the key was how much emotion we added to the situation. We planted in poor conditions last year only to raise good crops nationwide, with record yields in many areas. Now we plant in ideal conditions, and our expectations may be pumped up with some extra emotion. I hope we have given you some reasons to take a look at your plans, plug in your expectations, and make some profit minded decisions. Call us anytime to share ideas on how to best make these prices and expectations work for you and your operation. Mike Daube 888-391-6330 Alan Gard 800-205-1700 Ron Reed 877-304-2460 |
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