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"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." "Short Crop/Long Tail. or Onward and Upward?" We begin this month by looking back a bit, and talking about the strategy we used to protect insurance price calculations. As you know, we bought Dec 12 $8.00 puts, and sold Dec 13 $7.00 calls to establish a floor. Now that the fall insurance price is set, it is time to evaluate our position in terms of managing the risk we still have. Simply put, if you do not have the bushels to sell, only the insurance payment, we should exit those positions, or at least put stops in place to limit upside risk. Without cash bushels to sell, net farm income will decrease if the market rallys. If you have the corn in the bin, or in our case here in Northern Indiana, still some in the field, it is your choice as to when you feel that downside risk is significantly less than upside potential. What we need to do now is match up hedge positions with actual unsold cash inventory, and adjust our postions accordingly. The level of risk acceptance is always a decision each individual should make based on their situation, and not my advice, or anyone else for that matter. We will look ahead in the next few paragraphs and outline our thoughts, examine the risks as we see them, and let you decide how you view the next few months and next years price prospects. Since most of the important numbers are on the table with respect to yield and acres, the November 9th Supply/Demand Report, and the Crop Production Report should not have many surprises. We say "should" but also realize that bean yields could go up as historical patterns suggest. A higher percentage of plots were harvested earlier than normal, but there still could be enough new information to change some numbers. The arguements continue over harvested acres, but for now we feel like most of the potential fireworks have been discharged, and the market now will focus on South American weather, and demand, or the lack thereof. Trade volume is light, and therefore is subject to more volatility as it takes fewer big orders to make a bigger price move. We try not to get caught up in the day to day swings, leaving those for the "black box" traders, and try to determine some resonable targets to buy for end users and sell for producers. At this time you can look at any chart, and see that $7.32-$7.70 is a good range to work with in December corn, with $7.20 and $7.05 the next downside targets, and a close over $7.74 indicating that there is more strength out there and should be respected. If you have a good basis, then look for these areas to make more sales. Why not hold out for more? Lets look at some "red flags", or reasons that the "long tail" theory may play out this year. Corn 1) Ethanol margins are now break even at best, and crude oil prices appear weak. 2) Ethanol production dropped again last week, and more plants are either shutting down, or closing down. 3) Exports are the lowest in many years, other supplies are cheaper and our customers are shopping there 4) South American weater has improved, and there is still time to plant even in the super wet areas 5) Money flow: will next tuesdays election, another debt ceiling fight, or the implementation of Dodd/Frank change the outlook of investors? Beans 1) Improved South American weather: look at the inverse between January and March beans, 25 cents. Are we holding for less or betting on weather problems there? 2) Crush margins are very good now, and demand is solid at this time. Will January 1 find more willing sellers in a new tax year? 3) Money flow is still big, and funds are still long. Will the election results impact fund desires to be in, or reduce exposure? We have had numerous calls on next years prices, and will talk about them as well. Normally, we like to see the normal seasonals play out, see what the February average price is, and try to sell or establish a floor above that level. It is easy to look at the bottom line, out net farm income, and use those numbers to choose our insurance coverage, then combine that with a marketing plan. That would be normal, but if anyone can look back at the last 10 months and find anything that appears normal, please call me and tell me what it was. Last winter, $6.50 rationed the crop, and the outlook was for a huge new crop production. Early spring weather was great for early planting, and some were calling for selling two years crops at $5.50. Remember those? The question now, is have we choked off enough demand, or will we in the next few months to force prices down to those levels predicted last year, or even lower? As always, you can get plenty of ideas and "spin" out there to promote an agenda. We choose to look at what we do know, and what we dont, and then make a decision on the risk that is present or at least that which we do not want to carry. What we know: 1) $6.60 September 2013 futures offers a good profit based on current input costs and good yields 2) November beans at $13.44 may not be high enough to draw from corn acres given decent spring weather 3) South American weather, and ultimately production will have a major impact on prices of both crops What we dont know: 1) Election results, and if the "lame duck" session of Congress can find solutions to the "fiscal cliff" in terms of taxes, sequestration, and investments in general, before the deadlines. Do not overlook what the potential impact of this one, it is huge! 2) Europen debt issues, and their economy. Spanish unemployment is setting records. and there is still much work to do in getting that under control 3) Chinese growth, or slowing, and that governments response to it 4) Weather, weather, and more weather, not only in South America, but our western states are still very dry and need recharge of moisture 5) Outside markets, crude oil demand and price. If we continue into another recession, fuel demand, and ethanol prices could slip further. 6) Money flow, as always. Will it be impacted by more implementation of Dodd/Frank, or will that law be repealed? Given what we know, and having more than a little concern over what we dont know, I am preparing to lock in at least corn prices for next year very soon. I am also watching November 13 beans, which so far have been able to hold above $13.00 since last June. A move under that level may mean trouble, and need some protective action. Maybe I should be more agressive on beans as well, but the corn market looks the most vulnerable to me in terms of having these prices last out another year, and the current corn/bean price ration still favors corn. Simply put, by getting those values locked in for 2013 gives me 3 straight years of $6.00 + corn, and a very nice profit. We will put specific trade ideas using cash sales, futures, options, and combinations of these on the home page of the website very soon. As proponents of risk management, we would simply not be doing our job if not looking ahead and preparing, at least looking at some ideas if you are concerned about these factors as well. Please call us, and go over these and any other ideas that work for you to get some risk off the table. We can at least go over the charts and the key points of support and resistance to help make the best choice, given what is in front of us.
6.75 8.18
14.84 16.85 14.57 17.07 In conclusion, we do not want to inject undue emotion or speculation into our profession, there is plenty of that to go around. We did not get into the hype of last year, and will try not to get overly bearish this year, as weather could once again deal us a bad hand, and prices could again have to find a place to stop users from buying. We just feel that the "flags" this year are spelling some warnings, and we choose to pay attention, look at what we have, and decide accordingly. As you pay for next years inputs, negotiate the rental agreements, and total up the dollars you are putting out, it is very easy to look back at the last few years prices and be comfortable and feel safe. The problem is those prices are not guranteed yet, there is no insurance protection yet, and the Nation is under a high level of debt stress. My plan is to prepare for the worst, and hope for the best, as Americans pull together and get it done when the times get tough, and for that, I am extremely gratefull and proud. Sometimes the level and time duration of the political discourse causes us economic pain, and that is avoidable with a marketing plan that is flexible and able to respond to these times. Let us know if we can share some thoughts with you, and remember to take some time to give "Thanks" for all we have, and all our opportunities. We still live in the greatest place on the earth, and do so in freedom thanks to all who have defended it. To you Veterans, thank you, and for those of us who did not serve, take a few minutes to thank them not only on the 12th, but every chance you get.
Important dates to remember: November 9th Supply/Demand Report, and Crop Production Weekly Export Sales every Thursday Export Inspections every Monday November 16th Cattle on Feed Crop Progress every Monday, 3:00 pm Central Time
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