CFGAG News and Views           vol. 19    February 1, 2011

"There is a risk of loss when trading futures and options. The thoughts and opionions 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."

Today is the first day.........

Yes, today we start calculating the February average price for our crop insurance protection, and what a view it is. Unless something melts down soon, we should see the highest price we have ever seen for computing our guarantees and calculating some nice profit projections. Uh oh, there is that non-definitive word, projection. With all the bullishness of the day, we still have to take a glance at reality, and as we all know, consider the following:

1) We haven't planted the crop yet
2) We live in a world that can change the price course in a heartbeat
3) Lots of things could go wrong before we get the actual grain in the bin or across the scales.
4) What if that "23 year drought cycle" only hits my area this year.
This depressing list could go on, as any farmer knows. We choose to focus on the things we can control, which include ample preparation to not only produce the crop, but also market it at profitable levels. Normally, we would look to the emotional spring season to start hedging, but todays prices offer some very good profit margins, so should't we protect some? Always an individual decision, but one producer asked lately, "is there anything I can do to protect the price through the month of February?" The answer is yes, and the choices are many. For instance, March options expire on Feb. 18, which is more than half the month. If prices have not changed much by then, it will be a lot harder to come in with a sharply lower average. That would be the cheapest, along with a bear put spread that would pay for some of the time value by selling a lower strike put, but this is not as clear and certainly not going to guarantee the floor without other action such as a futures sell stop. April options would cover the entire time needed, and May options, while more expensive,would get us through the March 31 reports. As always, call us with your individual wants and needs to structure the tools to your comfort level.
The markets at this time seem to be "marking time" range bound with some big daily ranges, but not going in one direction for very long. The trade chatter remains very bullish, but other factors seem to be lacking for bull feed. An example to consider is this: everyone knows about the weather problems Argentina has had over the last 3-4 months, but has anyone noticed that the Brazilian crop esitmates have been growing, and some analysts are saying it could be a record of over 71 mmt? We hear of the food riots and civil unrest over food price inflation, but have you read much about the hoof and mouth disease in South Korea, or bird flu in Japan? Funny, but it seems to me a few years ago, the markets plummeted on this type of news, but not today, you hardly read a sentence on anything that might be price negative.This is why we like to focus on market psychology, and the things that turn it one way or the other.
Consider 2010, we certainly can go back now and see that January 12 and June 30 were major turn days in market psychology. Can we use those lessons and tell when the market will change direction? Sounds easy, but not so much. Last January there were many folks that thought USDA was wrong, and the proof would come later, just as last June we still thought that with less acres, the crop yield would still put us in a comfortable supply situation. At this writing, with the rains in Argentina, and the Brazil crop starting harvest, it would appear that we should be turning beans over, that 14 dollar beans should be plenty high. But the psychology is still bullish, and dips are bought because there is still uncertainty about transportation problems, dock strikes, and a host of other issues that may tighten our balence sheet further, and some are projecting less than 100 mb. carryout. So its not that easy, opinions and analysts will still argue their positions long after the market breaks, and only after a few months have passed will we look at a chart and say "yep, there it was, just as plain as the nose on your face, thats the day the psychology changed."
So how do we market under these conditions? It may sound redundant, but a good plan formed before the busy season has always helped me avoid the emotional pitfalls of marketing by crisis. A few simple steps like these may be useful:
1) Estimate cost of production in $ per acre
2) Consider some reasonable profit goals using some average yields and price projections
3) Utilize crop insurance software to lay out some risk management/acceptance strategies
4) Visit with your broker on some different marketing tool choices and budgets for each
5) Take all of these ideas to the lender and involve his/her thoughts in the mix
One idea we are using this year is a simple put spread, using your crop insurance policy to help with the floor price. For example, lets say the February average price is $5.90. You decide to utilize 85% insuance policy. One possibility would be to buy a $5.90 December put, and sell a $5.00 December put, as your insuance policy will kick in from there depending on yield. As mentioned above, utilizing some good crop insuance software to play "what if" can really ease the mind and make sales targets easier when you are more comfortable with crop development. This basic idea can be used in many ways, as some like to only buy options to cover specific risk areas, and others want the December optioins as it is easier to manage, and further trading may not be necessay. It puts a floor in, uses the crop insurance to reduce option costs, and leaves the top side totally open. What this does not do is sell the grain, which you must do at some point, but many are not comfortable selling a high percentage untill the crop is pollinated. Again, call us for ideas to apply to your specific needs.

From  the technical side, we have the following numbers from our computer to consider:
March Corn                Support                 Resistance
                                 6.42                      6.66
                                 6.27                      6.77
                                 6.12                      6.83
March Beans              13.94                     14.32
                                13.78                     14.60
                                13.63                     14.75

In conclusion, remember how nice it is to see prices like this at this time of year. It has never happened before in January. There are many market voices trumpeting record prices later on this year, and they may be right. The only caution here is that no one calling for this to happen will write you a check for the difference if they are wrong, just like those that called for $10 corn and $20 beans in 2008 did not then. You and I are the only ones responsible for selling our crop, and not selling at a profit this year could prove disasterous. My preference this year is to protect with options, but also have a "line in the sand" on a price I wll not let the market go below by having a sell stop in place for futures at that price. The price may change as the year goes on, depending on developments in other countries and weather, but there will be one in place before March 31. If I learned anything from 2008, it was to not trust anything but my profit goals, and set my line at or above that point. I can sell futures, or most elevators will honor stop orders for cash contracts. By July, my line will probably be right under the market if not filled already. Call us with any ideas or questions, or if you need a crop insurance agent with excellent software that can help you bring some big numbers together, and lets start computing that average price! 
Mike Daube      888-391-6330
Allen Gard       800-205-1700