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CFGAG News and Views vol. 42 January 1, 2013 "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." "Cliffs, Fiscal and Otherwise" It is January 1, and we are still "on the cliff" so to speak, as the Senate has passed a bill, and the House takes it up tonight or tomorrow. We still do not know what will happen, and when, and how the markets may react. I would love to fill this page with a rant on how "unbusinesslike" our Congress works, but that would violate what we have always said is important and what is not. We have to behave in a businesslike fashion, and prepare ourselves by managing risk and laying it off when we feel it necessary. We have to do what is in our business interest, and save our rants for the next "town hall meeting". We have to look at the prices of inputs, market prices for grain and livestock, and make marketing decisions that meet our profit goals. And, keep our emotions at a manageable level while making sound decisions. It is not easy to focus on this years profit goals when we look at the tax implications of the "fiscal cliff, the changing of estate tax levels, and the impact on funds and investors that may change the level of money flow into or out of the commodity markets. The most immediate concern is USDA Reports on January 11th, giving us the final production numbers from 2012, the Quarterly Grain Stocks, and the Monthly Supply/Demand numbers which will update South American production estimates. In the past few years, we have seen limit moves both up and down after the release of these reports, so being prepared is very important. This will also be the first time for a 11:00 am central time release for these reports, instead of 7:30 am. It is also on a Friday, so there will be three hours to trade before the weekend. The questions we have before us as we approach that day are as follows 1) Will USDA increase abandoned acres, and lower total production for 2012 corn? 2) Will bean production be increased? If so, will increased demand in crush and exports offset the increase? 3) Has feed use increased in the forth quarter? Hog numbers seem to show no liquidation 4) Will ethanol production estimates be lowered? 5) Will South American crops be increased due to favorable weather? Or will planting delays in Argentina be reflected There are plenty more, we could add that the recent sell off in corn and wheat has made our prices very competitive in the world marketplace, but until we see some real demand show up, it will probably be difficult to beat that drum very loudly. While grain prices have come under pressure, there are still some basic facts that will get some clarity a week from friday: 1) Corn stocks are still very tight, and so far farmer selling is sparse at best 2) Bean demand is still strong, crush margins are good, and again, farmers are not that excited about the price 3) While some precipitation has fallen, the western cornbelt remains extremely dry, and the wheat crop went in to dormancy in very tough shape. 4) This years carryout, next years projected carryout, and USDA projections on average farm prices Given what we know by looking back at the charts, we feel like it is a fair statement that unless we need to ration short supplies of corn, 6.50 is a good price. Just last year at this time we were getting projections of big corn acre numbers, (which we did get planted) and while old crop prices stayed firm, new crop began a long slide to the low $5.00 area. It was only the impact of the worst drought in 40 years that took us to new all time highs. Could we be setting ourselves up for the same pattern, with severe weather being the only hope for a return of 8.00 corn? We have to remember all the predictions of sub $5.00 corn last year, and also realize that we have destroyed some demand that may only return with much lower prices, or weather problems in other countries that now have taken over some of our exports. It is very possible to realize those dire predictions this year if the weather cooperates, and we are able to produce a good crop. It is also possible that the drought continues, and we have another year of sub par yields, and the market is once again forced higher to ration demand. We simply have to realize that corn could be $4.00 or less, or $8.00 or more depending on how much rationing is needed. So what do we do and when do we do it? If we look at the $6.25- $6.50 price level in new crop corn, and $13.25- $13.50 in new crop beans, both prices give us a decent profit, and are not out of reason depending on the January reports. We would hope for some rally in the new year to attain these levels, but if the negative potential is weighing on you, owning some short term February options going into the 11th may be a good idea. For grain producers, some puts, and for end users that fear a bullish report some calls. We feel a bullish report in either 2012 final production or grain stocks will see more reaction in the old crop months, so foer hedging next year it may work well to sell September or December futures and protect that hedge with a February call. If we have to do more rationing of this past years crop, March, May, or July will feel the most impact, while expectations of big plantings next spring may limit new crop advances. Be sure to check in early, as option prices will usually inflate before a big report, and make sure we have you covered on the risks that concern you the most.
5.50 8.45
12.45 16.47 10.95 17.97 In conclusion, when we look back at 2012, many will remember the drought and heat that made producing corn a real challenge. Maybe we got too complacent thinking that with our new genetic power and modern farming practices that yields under 100 bushels would just not happen anymore. The difference between good yields and nothing was only a couple rains and 10 degrees less heat at the crucial time, and there are many good producers that just did not get that moisture or relief from the heat. It is still in the hands of Mother Nature when it come to growing a big crop no matter what we do. What we do have control over is a complete plan with crop insurance and price protection to manage years like this, and that is what we try to help do. If you have been following the newsletters and the trade and hedge recommendations on the website, you know that this author is very concerned about the downside risk in corn prices, and is now 100% covered on 2013 prices on my farm. This does not mean it is right for you, but only a plan with a reason behind it, and a plan to react to what may or may not happen in the future. We will all be more enlightened on January 11th, but at 11:00 am, it may be too late to get a price you are happy with. Make sure you call and talk over some ideas that may get you in a more comfortable place before then. Thanks, and Happy New Year! Important dates to remember: January 11th Supply/Demand Report, Final 2012 Crop Production, and Quarterly Grain Stocks Weekly Export Sales every Thursday Export Inspections every Monday January 25th Cattle on Feed Crop Progress every Monday, 3:00 pm Central Time
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