CFGAG News and Views    Vol. 17    December 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 the accuracy or content. Past performance is not indicative of future results, and each individual should examine their own risk capital carefully before trading."
 
 
Whats on Your List?
 
As 2010 seems to be racing to the finish line, we have no shortage of things on our list to worry about. The North Koreans  seem intent on causing problems, we have nuclear threats from unstable nations, and the Chinese have food inflation problems they are trying to deal with. Every day brings more uncertainty, and with that, money flows into and out of our markets in big volumes every day in response to investor nerves, or bets on what will be the best place to put it. How can a farmer market intelligently when grain markets are so heavily influenced by world hiccups, and daily trading ranges are almost always double digits? The information overload, and the spin that goes along with it, are just overwhelming at times, as you certainly dont want to " sell too soon" as many think they did this past year, or not sell and watch the corn market drop a dollar in a matter of days. It just plain drives you nuts sometimes, and believe me, it is no different in the brokers chair. We are supposed to have a better handle on these things, and be able to see where the market is going. Right. Anyone that thinks they do usually ends up at the south end of a north bound mule, and that view is not pretty.
 
In reality, we cannot know how markets will react. Case in point is the dollar. A few weeks ago, the Fed announce a program of "quatitative easing" or simply the buying of debt by the Fed to stimulate the economy. It seemed everyone out there claimed the value of the US dollar was doomed, and since then the dollar has rallied almost every day. So much for the "experts". The likely explanation is that the market had well anticipated the action, setting up a "sell the rumor, buy the fact" situation, or another possibility, when bad news cant break the market, it is time to buy it. Now, there are many that say the dollar should be bought based on European debt issues.. Ok, but if the dollar is set up for another leg up, then where does that leave all the spec money that sold the dollar and bought commodities? If I have confused you by now, then you know what its like to come in every morning and try to make sense out of the world of markets, and try to help producers be profitable. Some days it just makes you nuts.
 
On the brighter side, there are many opportunities, and challenges that create more of them. December 2011 corn is trading above $5.00, November beans are above $11.50, which are both well above the price that many bushels were sold for last year. Do we sell now? What if we have a drought? What if the European Union melts down? What if North Korea or Iran do something crazy with some missles? What if the weather turns out great in South America? We are back to chasing our tails again, and adding more to the list. The following is my list of issues, not in any particular order:
 
1) World grain demand
2) World crop weather
3) Chinese actions, or reactions to inflation, North Korea, and speculation in the market place
4) European debt issues
5) US monetary policy
6) Ethanol tax credits, and then blending rate increases, or not
7) Profit goals and objectives
 
 
You may ask why "profit" is number 7, and I want you to. Why do we always get so wrapped up in a laundry list of other things, but seem to forget to look at what price makes us money first? I would bet you a glass of holiday cheer that the majority of producers find themselves in this box, too tightly wrapped in thought and worry about things to focus on the bottom line. Its why we worry so much about the corn sold at $4.25 and beans at $10.00 for 2010 than what current prices mean in terms of dollars per acre. Selling "too soon" keeps us from selling more when prices are higher. And yes, I am preaching to myself as well when I write this, and reminding myself that I need to avoid the emotionalism that leads to bad decisions.
 
So what to do. Each individual has their own risk tolerance, and should not confuse that level with someone else's. Costs vary widely, as well as profit goals. My suggestion is simple, and you have heard it often before. Start with what you need, and what you want. Come to a comfort level on what it will cost you per acre, and what you are comfortable with for yields. Using current prices, many find that profits are there now, but maybe your goal is somewhat higher. This is when you visit with us and see if we can find a strategy to protect a value you need, while giving the market time to work up to what you want. Be prepared, as the days of buying a put option to set a floor for 10 or 15 cents are probably gone for a while. Budgets have to include some sizeable funds for marketing, as flexibility is not going to be cheap, but being flexible in these wide ranging markets can really pay off if weather extremes  come to pass. How long has it been since the US has experianced a major drought? The most important part of risk management is knowing what your risk is, then creating a plan and budget for laying off what you dont want to accept and deal with later.
 
Once that plan is comfortable in your mind, we can help you put it in to motion. Crop insurance plays a big part here, as the protection level can lead us to a strategy that uses floor values of insurance to create a price protection strategy. For instance, lets say the February average price is $5.00 on corn, your APH is 150 bpa, and you chose a CRC policy at the 80% level. We can then look at buying a put to protect a floor price, (not a sale) and selling a lower strike put at a price level that we are comfortable with in terms of where the crop insurance payment would kick in. By doing this, we reduce our initial cost, but limit our downside to where insurance revenue covers our risk. These are hypothetical ideas, and there are many ways to use the tools, but by having floor in place, we can then let the market go where it will and know that our minimum revenue goals are met. We can then look at enhancing the postion with actual sales, rolling options, or putting trailing stops under a rallying market. The bottom line is, are we making more money with each transaction, reducing more risk, enhancing net farm income, or not.
 
We include some numbers from the technical side, with a reminder these are chart based, and areas to look at in terms of the markets ability to move through or fail at. There are times when these are very useful in constructing option strategies, or using stops on futures. Call us for specific ideas in relation to these numbers, as daily market activity can change them frequently.