CFGAG News and Views vol. 26 September 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."

"Is it a Disaster?"

Depends on where you live, and when you planted. Simply stated, after traveling around the midwest and visiting with producers from Ohio to Wyoming, there is no shortage of variability of crop conditions. There are some areas that have just had about the worst conditions possible from start to finish, from cold and wet soils at planting to extreme heat and dryness at pollination, there was little chance to get average yields in some areas. Yet some corn planted in June in Ohio may yet yield some very respectable production, IF we can get some rain and no early frost. Fields in the Dakotas offer some good prospects with the same "ifs".  The bottom line that everyone seems to be focused on is the average yield, and for the last month it seems as if we are in a race to see who can come up with the lowest production number. I remember very well the year 1991, when our crops in Northern Indiana were mudded in, then felt the blast furnace for 6 weeks in July and August, and had crops almost as bad as some of the drought years in the '80s. My biggest mistake that year was not selling anything into the rally, as Illinois and Iowa had some really good crops, and prices went from 2.90 to sub $2.00. I learned then that not selling a short crop was very painful, and took until 1995 to get well again. I re-live that experiance now (still hurts to talk about it) to point out the revenue side of what we still have on the table in terms of net farm income, and the risks we are now carrying.

At $7.50 cash corn, a 135 bu/a yield provides a gross income of over $1,000 per acre. If the price goes to $6.00, that same yield gives you $810, and $5.00 corn yields $675. This is the bottom line risk we are carrying at this writing, and why I remember 1991 so clearly. Can we really sell off this market that far? Lets look back for a moment at 2008. We topped out Dec futures at just under $8.00, then sold off to just under $3.00. I remember analysts that were projecting $10 corn, $15 wheat, and $20 beans, touting a new plateau for grains, never to see sub $5 corn again. Right. Are we in that same situation now? No one knows, but to ignore risk because some "expert" says so has not proven to be a bill payer on my farm. I learned long ago, (and the hard way) that it is my responsibility to sell my crop and minimize the risks that I cannot afford to take. The last couple years have been very kind to those doing no forward marketing, and that can certainly continue to be the case, but for us to turn away from prices that at least offer some profit even with below average crops seems to be rolling some heavy dice.


A quick glance at option protection to guard against any kind of major sell off may be worth a few minutes more study. $7.00 December corn puts are around 20 cents at this writing. Is 20 cents a lot for about 3 months worth of protection when the daily trading limit on corn is now 40 cents? It may seem unbelievable, but now, in the time span of 4 hours and 46 minutes, the price of corn could be down a dollar a bushel. If corn closes down the 40 cent limit in the day session, we now go to expanded limits of 60 cents, so in theory, from 1:15 to 6:01, we could lose a buck a bushel. Again, not to be a prophet of doom and gloom, just looking at the reality of what could happen, and be prepared. Are we promoting options at this point? Price insurance to cover unwanted risk is never a bad idea, but each individual has to make that call, we just want to be available to look at different options and strategies that fit what you want. Spend a few minutes over the long weekend to really consider what is at stake.

For those that look for more upside, there are certainly some factors that can help push prices to new highs, as the market may decide that rationing must take place immediately.

1) Continued weather problems, even the hint of early frost could spark new upside

2) Panic buying by end users if yield estimates continue to fall

3) Commercial elevators running out of margin money and forced to liquidate short hedges.

4) China has been relatively quiet.........could they decide to come into the buying mode?

5) Harvested acres can still be cut based on prevent plant as well as floods, drought, etc.

For bears, there are also plenty of ideas out there as well:

1) Market prices have already discounted a 145 national yield

2) Actual yields prove to be better than estimated

3) End users simply say no more, and throw in the towel

4) There is plenty of wheat in the world, and can keep a lid on corn price

5) "Short crops have long tails"

We look to the September 12 crop report with these factors in mind, and again emphasize that each individual has to look into their own situation to decide if cash sales, futures, options, spreads, or nothing at all is where you want to be before 7:30 on the 12th. As for cash sales, we want to talk basis for a minute, as this has a big potential for net farm income. Consider how much corn has been sold in your area, and for delivery at what time frame? One idea is that most sales are for Jan-Mar., and may hold a great basis bid in last half Nov, or Dec. Take a minute and look at bids in your area, as well as contract terms and flexibility. Will the elevator allow you to roll a futures only contract? Can you roll more than once, or is delivey time a firm commitment at a certain time? These factors can net you a nice return, if the spreads widen or the basis narrows enough to justify rolling out a few months, or is it a better deal to deliver early? Every location will likely be different based on forward sale, crop yields, and local demand. Call us for more discussion on this issue, as this could be a really hot item this fall and beyond. Dont forget the perils of basis as well: if end users "give it up", ie: local ethanol plant shuts down, then basis could weaken overnight. Producers may have to look at more options of delivery point than normal to get a good idea of what might be out there.

From  the technical side, we have the following numbers from our computer to consider:
Dec Corn                Support                 Resistance
                                 7.51                      8.03                                                                    
                                 7.24                      8.30
                                 6.97                      8.60

Nov Beans                 13.99                     14.93
                                13.40                     15.18

                                12.83                     15.54                               

 On the beans, we have reached a target of 14.58 that has been talked about for weeks/months. Can we go higher? Certainly, as compared to corn, beans are fairly cheap. Problem is that South America is still selling beans from very large crops from 6 months ago. Last year, China was buying beans from us hand over fist as Argentia was looking at weather issues, and Brazil was just so-so. At this writing, China is buying from there now, and even Taiwan bought SA beans this week. Our crop size is shrinking, but it may not be as big an issue as past years with the competition from SA. I cannot look at my cash flow with bean prices here and not at least be somewhat interested. Call us for some marketing ideas if you need some. 

In conclusion, as we approach the Labor Day weekend, we hope to take some time to enjoy life and celebrate the blessing of being able to work and produce crops with our family and friends. We also look to the anniversary of September 11, 2001, and remember that the price of that freedom is not cheap. For those that serve and protect us, we thank and salute as we celebrate our opportunities. Have a safe start to harvest, and hopefully find more than expected in terms of yield and quality.

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