CFGAG News and Views vol. 11   June 1, 2010

"There is a risk of loss when trading futures and options. The thoughts and opinions expressed 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 before trading."
"Supply, Demand, Money Flow, or Melt Down"?
     As we celebrate Memorial Day, and take a moment to remember the sacrifices of so many others that we may enjoy the freedom and opportunity of our great Nation, it is difficult not to get upset with the greed and corruption so evident in our world today. One has only to wonder what life would be like if everyone had the same sense of honor and valor that those who serve and have sacrificed on our behalf displayed. We thank them for their example, and also learn from our mistakes. One way to do a better job is to learn and then plan, using our experiences to do better.
We often talk about planning as being very important, and this month we want to get specific in terms of using what we have learned, take a look at the next 4-6 weeks, and go though some real planning. We know that last winter December corn had a high of $4.50, and that looks like a really great price now, with last fridays close of $3.80. We look at weather, and the perception is that weather is nearly ideal. I know some folks in Northern Missouri, Kentucky and Tennessee that would argue that perception, as many acres were washed out, replanted, maybe not planted at all. We have areas of problems every year, and maybe these have gone under reported, but overall, crop conditions say we are in pretty good shape. It is the next 6 weeks that will determine whether we make trend yields or not. While weather is key over this time frame, there are other factors that should not be overlooked:
1) Money Flow
2) China Demand
3) European Debt
4) Currency value relationships
5) "Hot Spots" like Korea, Iran, and Israel
There are many other things that can impact our markets, and we can easily feel "informaion overload" many times. What you or I may feel is the most important price driver can easily be overpowered by a knee jerk reaction on some piece of breaking news. Generally speaking, money flow into markets leads to price gains, but why is the money flowing in? Is it fear of where it was? Is it just profit taking? Why does the grain market care if Spain goes bankrupt? I could go on and on, but the idea here is that we really dont know what will be the trump card on price discovery day to day, unless the forcasts shifts to hot and dry for a month, and then we can be pretty sure. So what to do? Here comes the "P" word, Planning.
I always ask my clients, "what do you want, and what do you need". There is a reason, and it is all those thoughts listed above. It is where planning starts. Even though we are at June 1, and we may have missed some opportunity, we may have plenty left. We may not have much time to react, so getting orders in is very important. Regular readers and clients will know the following list from memory, but it bears repeating often:
1) Cover bushels you cannot or do not want to store, sell cash on good basis
2) Cover enough bushels of something to meet cash flow requirements.
3) Be aggressive on these, you can always re own them if justified
4) Watch for basis opportunities on beans if fall delivery is desired
With the market sell off last week, it is easy to get depressed and not pay attention. I would suggest the corn market could easily turn higher for a variety of reasons. Weather map runs come out every six hours, and throwing a hot and dry ridge pattern in could easily make the difference of achieving a price goal or missing it. This applies to U.S. OR China weather now that China has bought some corn from us. Money flow into commodities could also provide price opportunity, as well as debt solutions in Europe. Conversely, political tensions, default on credit, timely rain and moderate temps could reverse those ideas daily. Be ready, with a plan ahead of the pack to get things done. One example would be the following:
Buy a July 3.90 put/Sell a December 4.50 call. The put expires June 25, which may seem like a short time, but could see wild swings in price. If the market falls apart by June 25, the put can be exercised, then rolled to December futures, approximately a $4.05 floor less transaction costs. Then manage the short call option with stops or let expire.
Any combination of options can be used, but one must understand the risk of selling options and be comfortable with the concept. This is where some forethought can really help ease stress when markets get emotional. A good rule to go by is always decide what you will do with a postion before it gets there. For example, if you sell a 4.50 december call option, what will you do if the market hits 4.50? You have many good choices, but often we focus on what the cost to our trading account and not the value of crop in the field to sell. One choice is to sell the cash corn, and put a stop on the option. If you think we are on a long bull run, offset the option with a nearby option or a futures postion depending on your risk tolerance. The main thing is to recognize the increase in net farm income from the rally, and take advantage of it rather than worry over the loss of a few cents on the option. Again, thinking ahead and playing "what if" with your broker can really make things easier to deal with. Make sure you call us and do just that to prepare for the next 30 days.
From the technical side, we have the following numbers from the computer to consider:
                        Support                           Resistance
Dec Corn            3.54                                4.11
                        3.47                                4.18
                        3.35                                4.31
Nov Beans         8.92                                9.46
                        8.72                                9.67
                       8.60                                 9.79
In conclusion, remember the call to take emotion out of the decision making process, and the best way to do that is planning. Just as the planting season here forced me to change plans often, I still had the goal of timely planting of something into the best conditions possible given the weather. Marketing is no different, we want to sell at the best price possible, but may have to tweek our plans from time to time given all the conditions we talked about earlier. June 10 is our next report with supply/demand and also update on what USDA sees in terms of crop production. June 30 will bring us a prospective plantings update, and Im sure there will be lots of differing opionions expressed depending on what the weather has been like in your area. Call us well before these reports to get what you want and/or what you need translated to orders that meet your goals, as well as some thought as to "what if:" The clock is ticking on the development of potential crop problems related to weather, and if threats do not develop before pollination begins, we may not like our choices as well then.
Keep it safe out there, and take a moment to remember all our opportunities are made possible because many good men and women chose and continue to choose to defend our freedom every day.
Mike Daube   888-391-6330
Alan Gard     800-205-1700
Ron Reed     877-304-2460