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CFGAG News and Views vol. 41 December 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." "What You Don't Know........" The old saying, "what you don't know can't hurt you" is probably the worst example to use in trying to analyze markets, but today we have so many things out there that we really cannot know. We have the impending "fiscal cliff" that seems to attract lots of media attention and coverage, lots of political rhetoric, but no real indication of a solution or compromise. We have some areas in Argentina that are too wet, and planting has been delayed. In the Middle East, we have enough tension and unrest to easily cause investors to back away from risky investments. We have extremely dry conditions in the western belt in this country, and concerns are growing. The market has to digest all the information, and discover a price that reflects relative equilibrium given the collective attitudes of end users, producers, and speculators. Do not bet on less volatility as we go forward. As risk managers, our job is to try and determine when protective positions are in order, and how aggressive we need to be. Both producers and end users need to look at break evens, what is available in terms of market prices, and what tools we want to use. Normally, we look to hedge grain for the next crop in the spring, the "too" season to be exact, when it is always too wet, too dry, or to hot or cold. The potential threats to new production move to the front burner, and we usually get a decent rally to sell. With the drought of 2012, we have taken stocks to rationing levels once again, and the biggest question out there is, "has it been enough"? We have talked before about a futures market, but it bears repeating again and again. We do not trade what happened yesterday, but are trading what is developing out in time. In this perspective, we ask the following questions: 1) Have we reduced ethanol demand enough to get by to new crop, or will energy prices move higher and take corn with it? 2) Do new crop corn prices reflect enough weather premium now considering the dry conditions? 3) Will South American crops be big enough for the market place until US production comes in next fall? 4) If they do produce big crops, can they get them shipped out in a timely manner that satisfies demand? 5) What will be the effect of a "deal" in Washington DC, and what will happen if we "go over the cliff"? When making pricing decisions, the easiest decision is always to do nothing, just wait and see. This action of inaction was a very good plan last year when some analysts were imploring us to sell two years crops at $5.35. But when corn prices went over $8.00 and beans pushed up to near $18 this summer, that same decision to do nothing caused a lot of pain when prices dropped over a dollar a bushel in corn and over $4 in beans in a very short time. What we don't know, can hurt us after all. We have posted trade and hedging recommendations on the home page of the website, and hope you all have a chance to read them and consider your feelings as to current prices and the risks you carry. We try to always be very clear on what we think, and our reasons for the opinions we have. While it may be repetitive, we feel owning March put options is a good idea at this time, given the uncertainty that will shape our prices in the weeks and months to come. Our concerns over "money flow" issues continues, as the effects of Dodd/Frank legislation becomes more clearly understood. Simply put, speculators, fund managers, and managed money may not want to deal with the complications of these new rules. We have already witnessed large banks pulling out of investments in commodities, because of the potential negatives of being labeled "food speculators". Anything that causes money to "flow out" will cause prices to drop. I think it is fair to say that we did not get to $8.00 corn without speculators and fund investment, and without that push of large sums of cash, it will be harder if not impossible to get back there again. That said, if it doesn't rain for 3 months in the western corn belt, there will probably be plenty of money available to push higher. Our question, in terms of net farm income, is simply "do these prices reflect a level of income that is acceptable in terms of my profit goals?" If so, what is the most effective and comfortable way to protect that price level? Is it cash sales, options, option spreads, or futures? The bottom line answer is how you feel, not us, and if we can help to formulate a plan to accomplish your profit goals. All the rest is just hot air, and we have plenty of that coming out of Washington. Call us if any of these ideas have merit in meeting your goals and objectives.
6.23 8.18 5.70 8.47
13.35 15.28 13.14 15.76 12.79 16.25 In conclusion, as we finish our Thanksgiving leftovers, and prepare for the Christmas season, we thank you for your business, and count our blessings every day in the people we work with and relationships we enjoy. The chance to exchange ideas and solutions to problems with the greatest food and fiber producers in the world is a gift, and we appreciate the opportunity not only for business but also for friendships. Enjoy the blessing of Christmas, and we look forward to a new year and making plans to ensure a profitable and prosperous 2013!
Important dates to remember: December 11th Supply/Demand Report, and Crop Production Weekly Export Sales every Thursday Export Inspections every Monday November 21st Cattle on Feed Crop Progress every Monday, 3:00 pm Central Time
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