CFGAG News and Views           vol. 23      June 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."

More Uncertainty?

There is a phrase we use in the trade from time to time when it comes to the markets that goes: "Yesterday I was uncertain, today I'm not so sure", and if you live in Indiana or Ohio, that sure comes to mind often these days. "Will it ever quit raining? and "If it does, will it ever start again?" In 37 years of farming, I cannot remember this many unplanted fields on the first of June in these two states, and fields that are planted are not much to be proud of yet. If we were trading on the view out our windows here, there would be no short postions on now. We hear reports daily of crops "mudded in", and "I cant worry about replanting when I have over half to plant the first time." It is very stressfull, and lots of decisions remain. One of those is the prevented planting date, and what to do. June 5 is the magic date for corn, and opinions are all over the board on the impacts. We wont dwell on these issues, but simply say, be sure you contact your agent, and get some firm answers to questions like "If my neighbor plants and I dont, will my claim be denied?" The answer is be sure: call the agent, get an adjuster out to your farm and get his or her blessing. It is simply too much risk to take otherwise, and you dont need any more headaches than you have now. As for the economics of planting or not, its an individual decision, but we can help by walking through the options, and making sure we cover some risks. For instance, if you have forward contracted corn, and have not planted yet, you may need to develop a plan to cover those bushels, or if you have livestock and need some coverage in case you cannot produce what you need, we work with those ideas every day.

Planting progress numbers released May 31 show 86% of the corn planted, and 51% of the beans, below expectations, and simply put, there are 13 million corn acres left to plant on June 1. Why is the market not up the limit? Why have we not traded more than 3/4 of a cent above the old "double top" we referenced in last months newsletter? First of all, we still could, but as of this writing in the evening of May 31, we havent got there yet. While everyone seems aware of the slow planting and development of this years crop, there are other factors involved:

1) End users are not profitable- Hog and Cattle prices are well off the highs, and ethanol margins are now negative on average

2) Macro economic issues- US debt, European debt issues, and government policies that may or may not deal with them

3) Money flow- will funds come back in to their previous levels of investment, or will they back away?

4) Crop conditions in the west are much better than the east, possibly planted more corn acres than originally intended?

5) Lifting of the export ban on grain by Russia

6) Questions about the upcoming June reports on Plantings and also the Quarterly Grain Stocks

7) The effects of QE2 ending

I always try to ask myself, "if I had millions of investment dollars to put to work, where would I put them?" Corn is trading within a dime of its highs, and has been for a few days. Do we have the buying energy to start another leg up? For me, we will have to close above 6.84 in December futures to convince me. We need some bullish fuel, and if 13 million acres of corn to plant on June 1 cannot do it, it may be disappointing to the bulls. The same hedge advice we gave last month continues: selling corn between 6.50 and 6.84 is still a good idea, and if we close above 6.84, we need to defend the hedge by using options, spreads, margin money, or a combination of the three.

Beans at 51% planted seem a long way behind, but if the weather forcast holds, that number could go up significantly by next week. Temps in the high 80's and low 90's will get planters going and seeds sprouting quickly. It is hard to belive now, but two weeks of good weather could really change our outlook. Unfortunately, the market usually reacts before we get comfortable, and falls a lot faster than the time it took to go up. Consider bean hedges over 13.50 a decent price, and use a close over 14.10 to defend with options or spreads. China still has over a million metric tons of beans on the books for old crop, as yet unshipped, and that is a possible negative if not taken this marketing year. While there remains much uncertainty over planting, production, and demand, we need to take a good look at these prices again, and realize what they mean in terms of net farm income. At what point will you be comfortable locking some in? What will you feel like if we take a dollar off the corn price and 2 off the beans?

In preparation for the month ahead, we will be watching the following potential price movers:

1) Planting weather for the first 10 days of June

2) June 9th Monthly Supply/Demand Report

3) Fed discussion of interest rates, and monetary policy

4) Money flow into or out of commodities

5) Dollar strength or weakness

6) Major reports released on June 30: Planted Acres estimates, and the Quarterly Grain Stocks

There are many ways to reduce price risk ahead of any of these items, serial options being one of them. July options for grains expire June24, and August options expire July 22. These offer limited time value expense, but can be very effective in covering short term risks. Option premiums remain very high, but when you consider the futures prices involved, are an accurate reflection of the risks in the market. How many limit up and down days have we seen already this year? As in any trade, timing is everything, but having coverage at critical times can be huge. Lets say you are oversold in the cash market, and need to cover some of those bushels. On any decent sell off in price, owning a August call option ahead of the June 30 reports may be a good idea. If it is bullish, and the market rallies sharply, you can exercise that call into September futures. If the market sells off, you are out the premium and transaction costs, but the cost of not having the grain is less. As with any idea or strategy, make sure you call and completely understand the risks and reasons you are making this trade.

From  the technical side, we have the following numbers from our computer to consider:
July Corn                Support                 Resistance
                                 7.33                      7.67                                                                     
                                 6.93                      8.10
                                 6.55                      8.54

July Beans                 13.40                     14.29
                                12.83                     14.91
                                12.27                     15.51

In conclusion, it has certainly been a rough start to the 2011 crop year, and we wonder when and if we will ever hear about "global warming" again! We certainly arent talking drought in the east, but parts of Hard Wheat country cant buy a rain. When its in our yard, it is difficult to remember that every year there are problems, some are too wet, some are too dry, some are too cold, some are too hot. I read the other day that we will need "perfect" growing conditions to make this crop decent. What is perfect to you? The bottom line is average is the sum of the extremes, and every year there are many extremes. We got off to a great start last year, only to fall well short of expectations at harvest. It is hard to imagine record yields coming out of Indiana, Ohio, or North Dakota this year, but maybe a couple weeks of "good weather" will give us  some green plants other than weeds or water in our crop fields will make this "start" a bad dream we can forget someday. Be careful, be safe, and keep in touch!

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