CFGAG News and Views vol. 30 January 1, 2012

"Get Ready For January 12" 

Once again, one of the old market sayings came to pass, as "if the bears get
Thanksgiving, then the bulls will get Christmas" definitely
worked well this year. As we start the new year, with another long weekend
to rest and reflect, we certainly enjoyed a great end of the year rally. Beans
are up over a dollar off the lows, and corn over 70 cents. The obvous
driver is South American weather, which has turned warm and dry in some key
growing areas. Will it continue? Is this the only reason? Good questions,
and we will look at some possibilities, but the main focus of this article
is to consider the potential impact of the January reports. USDA will issue
final crop production numbers for 2011, the Quarterly Grain Stocks,
monthly Supply/Demand numbers, Winter Wheat seedings, and the corresponding
changes to ending stocks. To put it bluntly, this day of numbers is a really
big deal. We only have to look back two years when a bearish report sent the corn
market down limit, and set a negative tone in the market until June 30 of
that year, when USDA "lost" 300 million bushels in stocks. The
January reports are rather famous for producing numbers that cause wide
price swings in the market, and with the "weather rally" we
are now in, can really make it interesting. We cannot emphasize the potential
impacts on net farm income enough, history tells us that as well as
the state of the economy both here and around the world.

So what do we do? First of all, we need to determing our risk. How much old
crop grain are you holding? We have heard in this office that farmers
still hold 70% of their grain unpriced. We do not know if that
is an accurate number, but if it is, thats a lot of risk. With beans near
$12 and corn near $6.50, it is our opinion that this is a decent price worth
protection. New crop corn at $5.85 and beans over $12 may not be what we
really want, but may offer net farm incomes that are positive at least. If
South America continues to have major weather problems, if funds
come back in and own commodities in a big way, then we may
have significantly more upside to go. But what if what if either does not
happen? How much downside is there? As usual, we want to lay out both bullish
and bearish items for you to look at and see what you think the chances
are for rally or decline.

Bullish:

1) South American weather

2) Lots of investor money on the sidelines, low rate of return
on "safe" investments

3) Long term trends of growing middle class in China and India, more demand
for more meat 

4) End users still profitable with corn at $6 and beans at $12

5) Threats to crude oil supply with increased tension in Iran

Bearish:

1) Weather market "mature" in South America? Is damage priced in?

2) Fund losses in 2011 may not lead to money "pouring in"

3) Debt issues in the US and Europe- still no definitive resolution

4) Without blenders credit, ethanol margins look slim out into the summer

5) If Europe slips into a long recession, demand for goods from other
countries, especially China, likely falls. The dominos are set up............

Once we have examined our risk, and taken into account the factors listed
above that will play out, it is time to look ourselves squarly in the
mirror and ask honestly: "How much risk do I want to accept, and how much
is it worth to me to lay some of it off?" It is just that simple. If you
do not need, or want to protect yourself from price risk, then you need
read no further. If you feel that you cannot stand a "down limit" day
on January 12th, (and we are not saying it will happen, just possible) then we
need to do something. For old crop, we would be the last to advise against cash
corn sales at this level near $6.50, and beans at $12, but if you are
not ready to sell any more, then consider February or March options. February
options will expire January 27th. Not much time, but also less premium to pay
out. Very simple, only buying the protection needed for the report. What about
the advantages of March options? For one, they provide protection until
February 24th, and two, if we are looking at covering some new crop
bushels, March puts will cover all but a few days of the spring price
calculations for crop insurance. If the report is bearish, and markets
repeat the performance of 2010, we would be locking in a price well
above the February average as long as December futures respond similarly to
March futures. We would expect a bearish report to actually hit the front
months harder and the spreads to narrow, but that is not certain. If
the report is bullish, we could use the puts to buy futures against, thereby
limiting risk to the difference between the strike price and the futures price,
 plus the premium paid for the put. End users may look at this strategy to
cover needs before the report anticipating bullish numbers. USDA
reports have come under a lot of fire the last two years, and they may indeed
have some issues to deal with. We dont know how accurate these numbers will
prove to be, but we do know the market will trade them, and rather abruptly. It
does not matter who is right or wrong, the market is always "right".

We are starting a new feature this month to help "track" some options
every month. These are not recommendations, just examples of some strike prices
with corresponding futures month prices. By looking at these every month, we
should get a feel for time value decay, as well as some sense of volatility
depending on price action. If you like this, or want more, let us know. You can
always get updated information by calling the numbers below every day, but this
should give us some historical reference to look back on through the year.

March futures close, 12/30/11    $6.46 3/4                                                                   
December futures close       $5.86 1/4

February put options:                            
March put options:                                         
December put options: strike

$6.50      28 3/8 cents                               
36 3/4 cents                                             
$6.00          72 1/2 cents                     

$6.00       8 5/8cents                             15 1/8cents                                              

$5.50         45 1/2 cents

$5.00          25 3/8 cents

From  the technical side, we have the following numbers from our computer
to consider:

March  Corn               
Support                
Resistance

                                 5.80                      6.80                                                                    

                                 5.56                      7.06

                                 5.32                      7.33

                                 4.85                      7.80

 

March
Beans              10.93                    
12.56

                               
10.42                     13.12

                                
9.91                     
13.71                                                                9.43                     
14.30

In conclusion, we may sound like a broken record, but after watching report after
report lead to big price moves, we will take the risk of sounding like that to
make sure you all are aware of the risks involved. It is still your call on how
to deal with it in any way, if any is warrented in your opinion. Since 2010,
the market has rewared those who did nothing by "coming back". Will
we do it again this year? Very possible, if weather threatens supply in a
significant way, we could easily move over $7 to "ration" that
supply. Will we need to? If supply is perceived to be adequet, then we probably
wont see $7.00, as we have witnessed last year. End user profitability and fund
money will decide how far we can go. For us as producers, we have to decide
what we need, what we want, the probability of prices reaching those levels,
and then what action to take if they get there. Taking action in these volatile
times is difficult to say the least, we do not get much time to ponder choices
when we make 20-30 cent moves daily. Thats why it is so important that we visit
together over the winter months to make some plans, play "what if"
and prepare. We have excellent Crop Insurance representatives to work with if
you need them, as well as some proven cash marketing plans to  try out as
well if futures and options are not for you. Give us a call and set up some time
to visit to make sure you are comfortable with your overall plan before
spring. A lot of things are going to happen before the first seeds go into the
ground, and personally, I really enjoy being able to go out to the field with a
lot of these decisions made and plans in place. Watching the snow blow past the
office window today, then realizing that corn planters will be rolling in 30
days in the south kind of puts it into perspective. Winter will be over before
I know it, and then there wont be time to plan anymore, just get after it.
Happy New Year, and lets get to planning and preparing for a healthy and
profitable 2012!

Important dates to remember:

Jan 12 Final 2011 Crop Report

Weekly Export Sales every Thursday

Jan. 13 last trading day for Jan. Soybeans

Jan. 20 Cattle on Feed Report

Month of February= Crop Insurance prices set

Mike Daube      888-391-6330

Allen Gard       800-205-1700