CFGAG News and Views  vol. 25    August 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."

A cool July???

Yes, it was only 6 weeks ago many forcasters were calling for a cool and on the wet side July. Remember the worry about late planted crops having a chance to make it to maturity before the first frost? So much for that, now we field calls from folks that have experianced very little rain, and temps setting records to the high side. We recall last month the bearish numbers recieved on June 30, and the corresponding collapse of  corn futures prices, only to have a supply/demand report on July 12 that did not put all the corn found on June 30 into the carryout. Combine that with very warm and dry conditions in many areas of the corn belt, and off we go above $7 for December corn. No one can say that marketing is easy in this envirionment, when you first struggle to get seeds in the ground, then watch it burn up in a few short weeks, and folks tell you that you should be protecting this price?

One of the most important things we try to do is remove emotion from decision making, a very difficult task sometimes. We step back and look at where we started, analyze what is ahead, and see how our plan is working out. At the end of February, we knew that our insurance price was $6.01, a record high to base marketing decisions on. While we have experianced a ton of volatility, what have we seen develop? Comparatively, we have spent a few hours above $7, and a few hours below $6 basis December futures. We have witnessed July futures within a whisker of $8. Basis levels have been recorded over a dollar over nearby futures, leaving some producers the chance of selling cash corn above $8 per bushel. What does this tell us?

At this writing, it would appear that the market has once again done its job, and rationed out a short supply. In some instances end users were willing to pay up over $8 for cash corn, but that time was very limited. The basic range is $6-$7 with the most recent high of $7.22 1/2, and low of $5.75 1/2. When we had the sell off after June 30, we put the low in and found lots of buying interest from Japan, South Korea, and China. When we rallied back up to $7.03, we found that buying interest was not there anymore, and just as important if not more so, fund buying interest was absent also. We have witnessed a general decline in trading volume and open interest since last spring, with occaisional spurts in both at report times. So where are we now, and what should we do from here?

It is important now to scout those fields, a very painful process in some areas, and try to estimate production. Now, do you have enough sales made, futures hedges or option protection? Are you where you want to be in terms of risk? Does it make economic sense to lay off some price risk here? What are the market price movers from here on?

The bullish side of the trade is focusing on the following:

1) Extremely warm and dry conditons in many areas of the cornbelt

2) Record warm low temperatures for extended time

3) Strong basis and ethanol margins in July

4) Strong hog prices with good export demand

5) Dropping crop ratings, as well as development still behind average

The bears counter with these:

1) Negative world and US economic news, and as yet still failure to resolve the debt crisis

2) Spec money still long corn and beans

3) Export demand weakening at these higher prices

4) Wheat being used in feed and ethanol production

5) Longer term forcasts for moderating weather

We encourage you to call in and compare some notes, as these above items are subject to change by the hour. A deal or no deal in Washington DC may have a big impact on markets, as a downgrade in our AAA rating may cause some funds to sell, and we must be prepared for just about anything as the week begins. Stay in touch, as we have good resources to help guide us, and hopefully avoid some bad decisions.

So if we want to get some price protection, what do we do? We also need to focus on basis, and what is in front of us as far as cash prices. If you are in a short crop area, be aware that bids can get very hot in a short period of time. Making cash sales may not be the best choice, using futures or HTA contracts that can be rolled out with no basis set may pay off big this year. We try to use contacts in the industry to help us plan these sales, and try to attain the best basis we can. Last year, we knew that lots of sales were made for Jan-Mar time frame, and we able to move some corn at very good basis levels in Nov-Dec in this area. Your cash flow needs are imortant here, to plan and pull the trigger at levels you like verses levels you are forced to take. Make it a point if you dont already do so to pay close attention to basis level now. Here, we have seen it move in 15 cents for fall delivery in just a few weeks. Lets do the math: If you grow 100,000 bushels of corn, and can get 20 cents better than normal basis, thats $20,000 in YOUR pocket. Enough said.

Looking ahead, we will get another monthly Supply/Demand report on August 11. Anybody want to guess what USDA will have for us then? Will carryout be raised or lowered, corn lost or found? We feel the most important number, if there is any change, will be the harvested acres number. Many have felt that planting intentions were one thing, but floods, prevented planting and now drought and heat could lower that number. This will be the first chance to do this, but will they? Maybe they find we planted more? Remember the short term calls and puts if you need some comfort or someone else to carry some risk. September options expire on August 26, and provide good protection without paying a lot for time value. September at the money puts and calls are around 26 cents, which may seem high, but the risk is high as well. Call us to see if some of these may work for your plan. Remember, its been said before but bears repeating. If you have your risk management plan in place, and prices protected, it really doesnt matter what the report, the weatherman, or the local expert on markets say. It only matters if you are making a profit, and feel comfortable with your income goals.

From  the technical side, we have the following numbers from our computer to consider:
Dec Corn                Support                 Resistance
                                 6.46                      7.01                                                                    
                                 6.23                      7.27
                                 5.99                      7.55                        
Nov Beans                 13.21                     14.01
                                12.93                     14.31
                                12.38                     14.61                               

For some hedge ideas, consider the Dec 11/Dec 12 spread, as any big sell off can make this go from a 50 cent inverse to a carry market quickly. We have already witness that already this year. For sales, consider selling dec corn in the top end of the range, and using a close over the recent highs to spread it or own call options.

In conclusion, we really have a full plate ahead, with the Government issues on debt and deficits, world debt issues, and how these impact the money flow into or out of our markets. We will get production estimates from the big boys this week, and with the every 6 hour run of the weather models, plenty of gas or ice water to put on our prices. Try to keep focused on what you can do, that is protect the price that is available, and make sure when you turn in for the night you are content with that level of protection. If not, get in touch right away, and see if we can get some strategy together to get intot that comfort zone. Finally, my favorite market saying..."Bulls and Bears run every day, but the hogs always get slaughtered."  Have a safe and hopefully cooler August!

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