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CFGAG News and Views vol. 32 March 1, 2012 "There is a risk of loss when trading futures and options. The thoughts and opinions 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." "Preparing for March 30 " Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55 In this issue, we feel strongly enough about the risk level of the March 30 Quarterly Grain Stocks and Planting Intentions Reports that the major focus of our discussions should center on that date. There are many opinions on how much grain will show up in the Stocks Report, I would bet you will see wide ranges in the estimates, and probably just as much disagreement on the acres intentions. South American crop estimates have fallen in the past month, and have given the bulls some fodder for the recent rallies. Greek debt issues seem to have found some balance for now, and the economy "appears" to be stabilizing. Other factors that will generate much discussion in front of March 30 include: Bullish 1) Strong cash markets, and farmers still holding 2) Cuts in estimated South American crops 3) Decent export sales, delays in South American ports 4) Weather concerns in general: too hot, too cold, too wet and too dry somewhere 5) Internal prices in China suggest more imports? And for the negative side Bearish: 1) Ethanol: production slowing, and stocks still climbing 2) Warmer than normal winter equals less feed use? Will USDA "find" more corn out there? 3) Gasoline demand lower, prices keep climbing 4) Funds may limit risk exposure in commodities 5) Weather patterns now point to an early start for planting row crops The stage is for lots of fireworks, so we focus, as always, on the bottom line, net farm income. We have a pretty good handle on input costs for the coming year, but what about revenue? Do you have a price in mind that will inspire some sales? Do you have a minimum price in mind that will drive you crazy if the market goes below? Where would you like to start cash sales? Have you decided on the level and type of crop insurance? Before we can put together any marketing plan, these questions need to be addressed. In working with some of our producers, we find break evens from $4.00 to almost $6.00 for corn, but most are averaging in the $5.00 or less zone. Would a $5.90 floor, with over a dollar of upside potential work for you? If so, please evaluate the following idea, not a recommendation per se, just a hypothetical based on history and current market conditions. Since the September contract is trading more than 30 cents higher than December at this writing, and with last years chart to go by, we see that September at expiration last year was trading a 17 cents LESS than December. With a potential earlier start to planting, we feel September could easily become more of a new crop month. Therefore, to capture that inverse, as well as sell some time value to pay for time value, we look at the following: Buy September $6.00 put Sell December $5.00 put (roughly corresponds with price that crop insurance kicks in, be sure to check this with your agent) Sell December $7.00 call (a price that I would be happy to sell my cash corn, yours may be different) These are just examples, you may want to use other strikes, but this spread could be put on Feb. 29th for 10 cents cost. Managing this position requires first some margin on the short call position, and then a plan to deal with market moves beyond what we anticipate today. We feel that if December corn exceeds $6.50, we need to sell some cash corn and/or own a July call option to reduce margin pressure. Also, if the front month of corn takes out a low around 5.70, then increased downside protection may be needed. If the market chops inside those ranges, we simply let time value decay the value of the options sold, and look to buy back the December put on a rally in the upper end of the range, and buy back the short call on a down move. This will leave us with a floor price of $5.90 in the September, less any amount we have to pay to pick up the options sold. A two dollar window to sell cash corn in, as you feel comfortable, and a protective floor under you at what should be a profitable price as we head to the end of March. Be sure to call us to make sure you fully understand the execution and management plan we used as an example. These are only tools, and they should be shaped to fit what you want and are comfortable with, and only by spending some time and playing "what if" with some numbers can we get to a comfortable position for you. Other ideas are to simply buy some puts, May puts will cover you until April 20th, which may be enough to see the report and the start of the planting season. Others may want to get some cash sales done, and own some July calls in case China goes on a buying spree. We cannot emphasize enough the importance of having orders in for both the day and night trade. We seem to have more and more volatility in the overnight sessions, and lots of orders are getting filled at night, including options. If you want to make a cash sale, and your elevator will not use orders in the overnight session, you can do them in the futures market, and convert them the next day. Stop orders are also a good tool if you want to make sure you don't go below a certain price (that price that makes you crazy or marks the start of red ink). Say the December corn rallies above $6. You decide you don't want any less, so you place a "stop" order at $6.00. If the market keeps rising, you can raise your stop accordingly, as you see fit, or put a target order in place instead. As long as you have a stop in place, your reasonably sure you will get sold on any break down. The exceptions are when markets close near your stop, and then open sharply lower, below the range set by the CME. Be sure to stay in touch with us, or your elevator if that happens so we can be prepared for that possibility. Soybeans are very similar, by using spreads in November, you can achieve the same "window" of pricing. Make sure you look at volatility and trading ranges to make sure you are comfortable with the position, but the basic idea of paying for time value by selling time value still applies. It just has to fit your comfort level. We started a new feature this year to help "track" some options and their premium cost. 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 us, but this should give us some historical reference to look back on through the year. With each newsletter archived, you can follow these price relationships all year long. Futures close, 2/28/12 May: $6.58 September: $6.00 3/4 December: $5.68 1/2 (corn) May put options: September put options: December put options: strike $6.50 22 1/2 cents $6.00 49 1/2 cents $6.00 72 7/8 cents $6.00 6 1/4 cents $5.50 26 1/2 cents $5.50 44 1/2 cents $5.00 11 7/8 cents $5.00 23 3/4 cents
11.71 13.71 11.17 14.00 In conclusion, keep in mind there are lots of opinions out there, lots of ideas, and tons of emotion. We feel the best way to deal with the pressures of marketing is by forming a plan, one that is focused on YOUR needs and desires, not what some "expert" thinks. Remember, "EXPERT".....Ex is a has been, and a spurt is just a big drip under a lot of pressure! After reviewing your crop insurance plan, yield and price goals, lets see if any of the ideas above work for you. March 30 will be here before you know it, and there may be planting going on full bore by then. Lets make a point to get ready over the next two weeks to see how your income goals match up to market prices, and get some orders ready in case those goals can be met. If you need any crop insurance questions answered, or a strictly cash marketing plan, we can point you in the right direction as well. Lets hope the planting season is a little less crazy than last year, and we can all enjoy a productive year. (Now if we do, will prices be higher or lower? Are you ready for that?) Important dates to remember:
R. J. O'Brien & Associates, LLC Disclaimer: R. J. O'Brien & Associates, LLC Disclaimer: R. J. O'Brien & Associates, LLC Disclaimer: Trading in futures, securities, options or other derivatives, and OTC products entails significant risks which must be understood prior to trading and is not appropriate for all investors. Please contact your account representative for more information on these risks. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. Information and opinions contained herein come from sources |
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