CFGAG News and Views     vol. 11   July 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 belived 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."
 
 
"Another Report Surprise!"
 
With the release of the report the morning of June 30, you could almost hear the collective gasp. USDA updated the planting expectations by reducing corn acres by almost a million from the March 31 intentions, and increased bean acres over 700,000. Combine that with a Quarterly Grain Stocks report of 300,000,000 bushels LESS corn than the average trade guess, and it wasnt hard to predict we may trade limit up early. The big question is, how did the trade miss the mark so badly?
 
While pondering what words of wisdom I could shed on this, I went back through some old issues of this newsletter, and re-read some to spark some thoughts. I am also one of those folks that do the weekly crop reports that when combined with many others (3-5 per county), produce the weekly crop ratings and progress reports. While doing these weekly exercises, I often hear the critical words of those who "cant believe those numbers" or, "its just a beauty contest out there". I often wonder myself how I could be so far removed from others views. But that in itself is the answer: it is a human exercise that requires selective judgement. The value is statistically, with so many individuals judgement combined, the average is pretty good. The "human" element is also part of what led to so many traders being surprised by this report, in my opinion, as psychology and emotion (remember those words we talk about as marketing hurdles?) certainly played a major part. Consider the last two years planting seasons: in 2009, we had cold and wet conditions, major flooding, and it seemed like we would never see a planter in the ground. Illinois reported little if any corn planted on May 1, and the slowest planting ever in modern times. Yet we got harvest results in September from Illinois, even with the coldest July on record. Confused? Fact is, planting was taking place, we just had a mindset that it could not happen given the weather. Contrast that with this year, and with planters running on April 1, plenty of heat and good weather, it was easy to conclude, and develop a mindset, that we were going to plant an "extra" million or million and a half acres of corn. That mindset has led us to today, and a big surprise. I made a list over the last month of why we may not have that many acres as follows:
 
1) Last years late harvest prevented a lot of fall tillage for those planning corn on corn acres
2) Bean prices remained strong in spite of good weather in South America
3) While weather was good for the start of planting, we had a 3 week cold and wet spell that may have limited planting in many ares. Some flooded areas never had a chance
4) Last years drying bill was still fresh in many farmers mind when considering crop mix
 
 
I could go on, but again, going back to our comments on emotion and psychology, it is easy to see how many were caught off guard with todays numbers. Now, what do we do from here? We offer again, hopefully without emotion, the following:
 
1) The report was a June 1 survey, acres could still change based on weather after June 1.
2) We will anxiously await the July 9 Crop Production and Monthly Supply demand reports. These will have some yield estimates by USDA and also carryout numbers.
3) With soil moisture conditions adequet to surplus in many areas, and tasseling ahead of schedual, there are likely to be many acres of corn in excellent shape with reduced danger from excess heat or dryness.
4) The effects of ponding, reduced nitrogen, and weed pressure will not be fully known for quite a while. Producers are still trying to make the best of what they have. They always do.
 
 
Based on what we know now, we have not changed our minds as to targets to get some price protection in place. As always, be aggressive with bushels you cant or dont want to store. Look for good basis opportunities to move cash, if none exist, use futures, options, or option spreads to provide a floor. Specifically, we are looking at some of the following:
 
1) Buy December puts, at the money puts are approximately 25 cents
2) Buy September puts/sell December calls. This puts a floor in, and also a ceiling if no other action is taken. Margin is required on the short calls, and a management plan should always accompany each trade.
3) Sell futures or cash, and then buy call options to capture potential rallys.
4) Buy puts, then sell a lower strike put to offset some of the premium cost. Selling a put at a level protected by Crop Insurance is the safest, make sure you work with your agent and broker together to make sure you have the right levels.
 
As always, we want you to call us to discuss these and other ideas completely. A sound plan takes some time, and helps prevent nasty surprises like corn market bears got today.
 
From a general point of view, there are many days before combines roll, and many things can go wrong, or get better. We still face economic uncertainty, both here and abroad. Will China come in for more corn? Will the effects of the newly arrived La Nina affect yields? There are many more questions than answers even now, but we do know that end users of corn will be less complacent than they were a day ago. What we do not want to do is get caught up in the euphoria of a bullish report, and forget to look at our marketing plans and adjust for what we have in front of us. Its time to re-evaluate yield potential of what we have out there, adjust hedges and sales postitions, and check with your insurance agent. The agent can be very helpfull in keeping the screen clear as to trigger levels, prevented planting impact, and revenue projections.
 
Enjoy the holiday this weekend, celebrate the freedoms we all enjoy, and take a moment to thank all those that protect them. The Founding Fathers gave us a tremendous gift, lets take a minute or two to reflect on that at the cook out.
 
Call us with specific ideas or help with some planning, and stay in touch. 
 
 
Mike Daube          888-391-6330
Alan Gard            800-205-1700
Ron Reed             877-304-2460