Set a marketing game plan
Share Facebook Twitter Google + LinkedIn Pinterest CornUSDA surprised Chicago analysts last week by reducing 2015 corn acres estimates — 200K planted but 500K harvested. This could reduce 2015 bushels by 80 to100 million, and ultimately support prices. Still questions remain:• Will harvested acres stay low?• Will USDA revise estimates in the future?• Will excessive rainfall cause a drop in USDA yield estimates in July?• With abundance of forage in the South will some silage acres be harvested for corn?Interestingly, sorghum planted acres were up 1 million. Comparing total corn and sorghum acres between 2014 and 2015, there was no change. When the massive amount of low quality wheat is also considered (which will likely replace some corn feed), could long-term corn be a bit “overdone?” Crop reportsNE — with the recent good weather, crops are looking much better than two weeks agoKS — some progress was made on double crop soybeans last week.IN & OH — crops are uneven and yield estimates are uncertainEurope — Very hot with dry top soil, likely reducing corn yields over 10%China and Canada — some dry weather concernsWeather is clearly critical to yield for the next few weeks. Market volatility will continue.End users bought more corn this week than any other week in the past few years. Many farmers behind in 2014 sales “pulled the trigger.” This caused basis (cash price verses CBOT price) to drop 15 to 25 cents across the country. Corn is trading at levels that farmers can largely make money at this year, so some started making new crop sales as well. SoybeansBean acres are still an unknown. Even the USDA will resurvey farmers in July to get better planted acre estimates. With the recent $1 per bushel rally in the futures market, farmers are scrambling to get beans planted even at such a late date verses taking prevent plant. The price range for beans has gotten wider instead of narrower, making predictions impossible. Futures TradeBefore last week’s report, I suggested having “wish orders” in the market. I placed an offer (5% of my production) to sell Dec futures at $4.24, a target value I have had on since April. This is the first futures sale I’ve made since last October when I had extra grain production at harvest. The trade before that was 8/11/14 when I made a sale at $4.08. Options TradeFollowing deconstructs a recent trade that shows not only how farmers can pick up market carry premiums but also how it allows me to take advantage of rallies and reduce risk by keeping my choices open.On 10/9/14 futures were trading $3.40, which was up 22 cents off harvest lows 10 days earlier. Hindsight shows I should have waited. However, I sold a Jan $3.60 call (selling a call is giving the rights to someone to buy grain at $3.60 from me) for 13.5 cents that would expire on 12/26/14. On 12/26/14 futures were above that $3.60 call, so that trade became a futures contract sale at $3.735 ($3.60 + $.135 premium I received for selling my rights).On 12/29/14 because the Dec futures were ready to expire I had to move them forward in time unless I wanted to move grain at the end of December, which I did not want to do. I bought back my Dec futures and sold the Jul ’15 futures at a 15 cent profit (thus I pushed the trade forward). After commissions the sales price was now $3.875 ($3.735+$.14 profit to move it to the July futures).July ’15 is about to expire, so I have to move this trade forward to Dec ’15. Once again, I will buy my sale back in the Jul and sell it again in Dec ’15 for another 17.5 cent profit – Now the trade is worth $4.05 against Dec ($3.875+$.175 profit to move it to the Dec futures after commissions.)So basically, I increased my sales position by moving my trade forward using market carry and call premium from $3.40 to $4.05 while maintaining flexibility in my marketing strategy.I am nearly 100% sold for 2015 harvest, so I’ll likely need to move this trade forward again into 2016 (unless there is above average yields this harvest). In Dec I’ll make that decision based upon the market conditions and crop yields at that time. Listening to ExpertsThe recent market “run up” highlights why farmers need a “game plan.” Many experts analyze technical signals to predict market trends. In many cases, their records are pretty good — estimates indicate they are accurate 70% of the time. This is why speculators follow expert advice and why farmers hear “the trend is your friend.” Weather is the big unknown and why the experts can’t predict more accurately long-term what will occur.Last week an expert was asked, “What should farmers do before the report?” He said it is difficult to know from a farmer’s point of view, but from a “trader’s perspective” he would look for a rally. Clearly that expert was correct, considering the recent rally. The trouble is, most farmers aren’t traders (really just a fancy word for speculator). Most aren’t getting in and out of the market.There are only two kinds of people involved in the futures market — hedgers or speculators. You are either one or the other. Farmers are natural hedgers because they have to continually sell their crop (at least eventually, grains have a shelf-life). Since they HAVE to sell, farmers have to take a different view of the market from the experts.I urge all of my clients to let go of the fantasy that they will always hit the top of the market. I don’t know anyone who can do that. Rather, I recommend setting a “game plan” or marketing strategy that takes advantage of the available premiums in the market based upon historical trends and utilize all the marketing “tools” in the tool box to increase flexibility and reduce risk.Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations. Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. 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