CFGAG News and Views           vol. 20         March 1, 2011

"So new crop corn is $6.00, now what???

Yes, it is true, the February average price for December corn is $6.00, actually $6.01, with soybeans at $13.49, pending RMA approval. The highest prices we have to base our insurance guarantees on ever. Will this inspire producers to grow more acres of corn, or will cotton, soybean, and wheat prices hold their acreage base together? Can we actually plant almost 10 million acres more to meet the USDA Outlook Board projections? Will we be able to achieve trend line yields with these "extra acres" factored in? Have we reached a price level that has started "rationing" old crop supplies? These questions and more will dominate market chatter as we move toward March 31 when USDA reports released at 7:30 central time will be some of the most watched, and anticipated in quite some time if ever. Our focus this month is on this date, and what we can look for and do to be ready and prepared.
 
We will get both the Planting Intention Report, as well as the Quarterly Grain Stocks that morning. As of this writing, the bullish side of corn has not changed at all, we are still looking at numbers that are just extremely tight. It doesn't matter how you look at it, there is just no room for error or extra demand popping up, unless we either have more stocks than thought now, or we reduce demand from somewhere. Ethanol production has dropped slightly each of the last 4 weeks, but not enough on balence to significantly change the landscape yet. Now that we have looked at this side, here are some "possible" reasons why the carryout numbers could go up:
 
1) USDA "finds" more bushels in old crop inventory
2) Corn quality has led to more gallons per bushel used
3) Ethanol plants have been operating more efficiently, squeezing more product from less bushels by slowing down the process
4) Export shipments do not keep up with sales, raising ending stocks
 
As to number 1 above, we can easily remember last year when 300 million bushels of corn was "found" and later "lost", only to be "found" again as compared to market expectations, and the volatile price action that followed. In no way am I impuning the reports, but just noting that these numbers can be quite different than expected, and market reaction can be huge. The message here is not to point and swear, but just to prepare for what we do not want to happen. For corn, we certainly have a bullish mentality going, and if for some reason that changes, I do not want to be sitting unprotected.
 
On beans, we now have some signs of caution, as early harvest in Brazil has found some really good yields, and crop size estimates are going higher, with some whispers of 72mmt or higher. Even Argentina now has estimates coming back from earlier estimates of 45 mmt to 48 or even 50 mmt. Total SAM production could lead us to a larger world carryout than a year ago when beans were trading in the $9.00 range. Remember that planting pace was late last fall in South America, and harvest/availabiliy will be delayed from normal, and they still need good harvest weather to bring in this crop and get it to  market. We can all remember not too many years ago when a huge crop was cut back significantly due to excess rain and transportation issues kept US beans in the ballgame.
 
All that said, we still have to make some decisions, and have the plans ready. March 15 is the deadline for Crop Insurance decisions, and we would guess that many of you are still undecided on what to do. If you need some ideas on this topic, we are connected with an excellent agency that has the software to make decision making easier. You can look at the whole farm in terms of dollars per acre, plan some sales or option strategies with the products complimenting each other. Give us a call if you are uncertain, and we can point you in the right direction. If you have made that decision, then it comes down to the price and time to make cash sales or protect the price on paper. No one knows how high we can go, or when the market will "top out", but we can lock in some good profits here, and stay within your comfort zone with upside option protection as well. Each individual has there own perception of the market, and numbers to work. Our service is predicated on individual desires and needs, in terms of an overall plan of profitability. Some may want more cash sold, with options or spreads to capture possible gains. Others may want to wait for better basis on the cash side, and use futures, options, or spreads to cover downside risk. Going back to last month, we outlined a put spread that is still a viable choice, where we buy at the money puts, and sell puts at a strike price equal to where your insurance coverage kicks in, esentially selling some time value to pay for some of the time value of the at the money put. This puts a floor price in, and leaves the top open to sell cash later when more facts are on the table. We can do this spread in any month, depending on how much risk you feel is present at any given time. Options do not have to be held to expiration, they can be traded every day, so owning some for a short period of time may be useful in your overall plan, but try to avoid buying them close to major report days, as the price is often inflated due to volatility. 
 

From  the technical side, we have the following numbers from our computer to consider:
 
July Corn                Support                 Resistance
                                 6.86                      7.24                                                                     
                                 6.72                      7.38
                                 6.60                      7.51
 
July Beans                 13.15                     13.62
                                13.01                     13.78
                                12.86                     13.92

In conclusion, remember how nice it is to see prices like this at this time of year. It is not that long ago when we prepared to plant a crop and had to hope for higher prices later on just to scratch out a profit, if not just break even. I have heard more than once that high prices just dont last that long. The question today is just what is a "high price"? Are we now in fact entering, or climbing onto a "new plateau"? We dont pretend to know, but are still smarting a bit from the last move "up here" in 2008, and remember well the lessons learned from not taking some of the cookies off the tray before July 4th that year. Can we maintain the strength of this market until then? Or will March 31 or sooner change the landscape causing speculator money to find another home? Again, we dont know, but certainly have the tools in our tool box to make sure we do not have to relive the pain of not selling or protecting our equity and the return on our hard work and management. Last tuesday, the grain markets were down the daily limit, which in real terms meant that if you were sitting on or planning to produce 100,000 bushels of corn, you lost $30,000 period. Yes, the markets did come back this time, but the simple math shows what the impact could be if it doesnt come back. 25,000 bushels of beans lost $35,000. In one day. Each individual knows how much risk he or she is comfortable with, and for how long.That is still the beauty of this country, we still get to do what we want and when we want to do it. Analysts and commentators will continue to ponder and recommend, but you still get to make the call. We give thanks today and for every day that someone gave us this right, and still protect it. Have a great month in anticipation of getting those planters in the field and doing what we do so well in providing food and fiber for the world, and call us for some ideas on protecting the value of that production! 
 
Mike Daube      888-391-6330
Allen Gard       800-205-1700