CFGAG News and Views           vol. 22        May 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."
 Can you spell "Volatility"?  

In our conversations with market analysts, other brokers, and customers, one quote is often repeated...."Nothing in market price movement on a daily basis surprises me anymore".  The month of April, following a bullish March 31 report,  gave bulls and bears both some fodder to chew on. We noted last month to watch spreads for clues, watch for signs of demand destruction, and also for signs of fund liquidation, as money flow in or out may be a more important factor than weather. Boy, did we get all of these things and more! Lets look at some of the highlights for April now:

1) Planting weather is far from ideal, many acres are under water, and temperature is just plain cold.  

2) Actual planting progress may well show the third slowest start since 1985

3) Open interest in corn has dropped significantly, actually losing over 28,000 contracts on 4/28

4) We have a "double top" in Dec corn futures at $6.84

5) The July/Dec corn spread raced up to 132 after 3/31, another "double top" then fell back sharply to close at 87 on Friday, 4/29

6) Basis levels have started to show improvement in some areas for both corn and beans, while others stay relatively weak for projected "tightness"

7) Ethanol production has slipped back this month, weekly production figures imply slightly less corn usage

So what do we read from all this? Our bottom line is still the same as before, 6.00 corn and 13.00 beans are good prices, only now we have some red flags in the air especially after the last weeks trade. Those of you that have talked to us on a regular basis know that we have not had a real "sense of urgency" in the corn market once the bullish report was issued on March 31. We felt like the July/Dec spread should push through the old highs, that until we saw some demand rationing, or some other market psychology changing event, that corn was the leader and we should be on our way to new levels. Now, we have double tops on the charts, a computer sell signal on Dec corn when the hourly went short at 6.68 this past week. We have seen big fund liquidation, possible slowdown on ethanol demand, a weather forcast that would seem very bullish, yet no new highs yet. In our mind, it is time to get serious about protecting price levels.

Do not misunderstand, by the time you read this article, we may have already made new highs, and all the above will be moot. How do you react when markets are locked down limit on thursday, yet rally back the same on friday? No one can forsee or explain these whipsaws, except to say, "nothing surprises me anymore". What we can do is start preparing for what is to come, and we highlight those factors that may impact price in the days to come:

1) Weather and planting progress

2) Money flow and Specualtive positions

3) QE 2 ending in May

4) Chinese actions on currency float, and anti inflation actions

5) US Government policy on debt, money supply, interest rates, and energy

6) Possible acreage shifts in areas of extreme weather difficulities

We still point to money flow as the primary price driver, but the next two weeks and the following two weeks forcast will be huge. While not in the "panic" mode yet, many producers are now faced with the difficult decision of how much to "push the envelope" of less than ideal soil conditions verses not getting the seeds in the ground at all. With modern equipment and economic incentive as it is, we doubt the crop will not get planted, but poor seeding conditions can certainly lead to lower yield potential, and the market will likely be very sensitive to these factors. Remember, last year we had big yield expectations as late as August, only to find many disappointing fields a month later. It was the first time in years that our "new genetics" did not exceed our expectations, but fell short. That being said, I know what we will do here, and when/if conditions get right, we will go non stop to take advantage of any weather window available.

It is the other factors, numbers 3,4, and 5 above that concern us most, as we have little warning or understanding of how the market will react to a variety of events. We note from past history that when QE, or "quantative easing" programs have ended, the stock market and commodity markets have sold off. Is that why we saw heavy fund liquidation lately? It is a futures market, and when fund managers think a market move is run its course, they get out, period. The US dollar has been under heavy pressure lately, which should be positive for commodities, right? Perhaps we are getting ready to put a major low in the dollar,  and funds are anticipating that by moving some long grain positions for someone else to hold. If we go by the old adage that "when bullish news cant rally a market, it is time to get short" we should have sold hand over fist this past week. Then friday comes and we rally back. I plan on buying and hording large supplies of antacids and ulcer medications for the certain shortage that will be with us by July.

So what to do now? It is in our minds time to get serious about protecting prices. We look at the price action in April, look at the "weather market" we are in, and feel action is waranted. For corn, option spreads creating a window of price opportunity are still a good choice, with buying 6.50 puts, selling 5.00 puts and 8.00 calls a popular combination. Make sure you understand the risks involved in this strategy, and have a management plan for this and any other postion, as market volatility and emotion can cause lots of problems if not prepared for in advance. Another choice is simply a sell "stop" below the market, say at 6.50 for corn and 13.00 for Nov beans, with a management plan of margining, spreading to another futures contract month, or defending the hedge with a call option in place before a crisis. You can also make cash or futures sales in the 6.50- 6.80 range, and use the double top as a point to spread the hedge if we go through it. Make sure you spend some time covering the "what ifs" with us on these or any marketing idea. We are not opposed to cash sales in these areas either, but find now with planting delays, producers are less comfortable with cash sales until more is known as to when the planters can roll. The market will not care if you dont protect the price now because of the uncertainty of your production, and may or may not give us a second chance. It is our job to sell what we produce, and finding the strategy that makes you the most comfortable is our job together. Give us a call with your specific wants and needs to make this happen.


From  the technical side, we have the following numbers from our computer to consider:
July Corn                Support                 Resistance
                                 7.22                      7.46                                                                     
                                 6.96                      8.08
                                 6.70                      8.30

                                 6.54                      8.51
July Beans                 12.76                     13.99
                                12.01                     14.45
                                11.54                     15.08

                                10.79                     15.68

In conclusion, we certainly hope for a break in the adverse weather, while also mindful of years past when we struggled to get the crop in only to find that conditions "averaged out" just fine as the year went on. With prices this high, it will be tempting to jump the gun and plant too quickly, or make changes to crop mixes that may not be the best longer term choice. These are part of the many challenges that producers face that some of our urban friends dont comprehend. It is very easy for non farm folks to just point to the futures price and assume that great wealth is being accuired with no realization of what inputs cost, what basis is, and the risks taken on by todays food producers. We hear complaints about the cost food, but sense no understanding that there is about the same cost for the bread wrapper as the cost of the wheat to make that loaf of bread. We hear complaints about the ethanol industry, but what would the price of gasoline be now without it? We hear complaints about the farm program, yet few realize that the vast majority of the budget for USDA goes to support programs for assistance to the poor. We are entering a time period where budget cuts, tax increases, and debt will dominate the political agenda, and how it is resolved with reference to markets, speculation, position limits, etc will certainly impact our prices. Let us make sure we do our job of protecting our net farm income by covering some price risk and making sure we do not repeat the disaster of 2008. Speculators drove prices up, and can certainly drive them down. Above all, keep in mind we still live in the greatest country in the world, and enjoy many benefits that many do not, and we still have the freedom and power of choice to do as we see fit. God Bless, and keep it safe and as happy as possible as we try to get this crop in the ground!

Mike Daube      888-391-6330
Allen Gard       800-205-1700