CFGAG News and Views     vol. 34    May 1, 2012

"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 Out There, or Not? "  Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55

The BIG question..........are the corn and bean supplies out there? If so, how strong are the "holders", and if not, have we gone high enough in price to ration it yet, or do we have more to go? In writing this article on the afternoon of the last day of April, two unusual things have happened. May corn closed 26 cents ABOVE July corn, and this morning, 762 contracts of beans were "delivered" when none were expected. I cannot remember a time when the May option traded this far over the July, and I am sure you are asking, "so what". I guess the question is more important to anyone that has a sizeable amount of old crop corn left to market, or a commercial entity that has grain hedged, and now looks at an inverted market with only basis strength to offset the loss. Regardless of your position, there simply is no reason to hold corn unless you believe that we will indeed run short, and basis will skyrocket like last year. Or, the expectations of a bin buster crop this year will somehow falll short, and a cool summer may delay the anticipated early harvest. The big question again, who has the grain, and if its there, when will it show up?

On the beans, a surprise delivery put early pressure on the May option, only to see a rally led by new crop November take us back over $15.00 by the close. The market seems to believe that South American crop size will continue to shrink, and rationing by higher prices will need to continue untill more is "known". Hence, we have record long postions in the funds hands, with a majority of those positions in the old crop months. How much higher can we go? As long as someone is willing to buy it. It will be interesting to see if there are more deliveries this week, and if we do indeed see some, how the old crop/new crop spread reacts. If you are holding some beans from last year, it may not be a bad idea to put some sell stops under the market at a price you do not want to see the market go below. If your elevator will not do this, or will not put in those orders for overnight trade, call us to see how you can protect yourself. In the meantime, we will look to May 10th and the monthly supply/demand report to see if USDA changes the numbers in both US carryout, or drops South American production enough to cause more rationing, or if we have indeed, gone far enough.

There are always lots of questions and opinions on how the markets will react to "changes", but only if we can determine where the market "is" before the "change" occurs.That may sound a little silly, but think back to the last few USDA reports. It was obvious that the trade was caught off guard many times over the past few years, and price action proved that many times traders get caught up in a train of thought, only to be punished for assuming too much in one direction. We are presenting the following questions, not as opinions, but more to the point as to where the market "is" right now.

1) Has the fast start to planting convinced us a huge crop is on the way?

2) Has the rally in beans caused more producers to "switch" to more beans? Or will the acres of all crops get bigger?

3) Is the shortfall in South American production being overplayed like the Russian drought of a couple years ago in terms of "extra exports"

4) How will "spread unwinding" affect the flat price of corn, beans, and wheat?

5) Will the cooler April temps really delay the much anticipated new crop corn supplies? Will we run out before that?

6) Will early wheat harvest add more double crop bean acres, and more feed supply options?

It would seem that the market has been convinced since last winter that US producers were going to produce a mammoth corn crop this year, and with early warmth in March, and dry soil conditions, a lot more seeds are in the ground this year than almost any other year on record. It appears that simple math produces a lot of new crop corn in August, right? For some reason, I remember a term called "Growing Degree Days" that will have the final say on when the new crop will come available. It was only 2 1/2 years ago that we harvested and entire crop that never got below 24% moisture, and that corn was all harvested in November. Yes, a bit on the extreme side, but we were certainly not that lated in planting, it was just the coolest summer we recorded in many years. The poing is, the market is still anticipating a huge crop, and that may very well materialize, but we were talking about how the market may react to "changes", right? The point is, there is lots of weather to deal with, many acres still to plant,(47% of the corn and 88% of the beans as of 3 pm today), and a plethora of news to deal with every day concerning the economy, European debt and elections, and our own Congress wrestling with ideas on how to reduce our debts here. Bottom line...........there is no certainty but uncertainty, and thats why traders vote with their wallets every day.

We would prefer to keep track of one line, OUR bottom line as to profitability in trying to produce grain for a profit. It is here that we share our thoughts as to where we "are" in terms of our marketing of last year's, and this year's crop.

1) We are essentially sold out of 2011 bushels, both corn and beans.

2) We are approaching 50% sold on 2012 beans, and are using option spreads to put floors in on the balence, creating a window up to $15.00 on November beans

3) We have little or no cash corn sold for this year, but have the 3 way option spread on protecting a $5.90- $5.95 floor basis September futures for at least half of our expected production. We would still advocate adding to that position, or making cash sales on any rally approaching $6.00, given what we know now.

As referenced, the option spread on corn, which was described in detail the last two issues of this newsletter, has been a good tool so far. It consisted of buying a September $6.00 put, and selling both a December $5.00 put and a December $7.00 call for a total cost of 5-10 cents. At this point in time, most producers we have with this on have rolled down the $6.00 September put to a $5.40 put for about forty cents. The other positions remain the same, but we want to remind you to review our management plan with these postions. We want to remove the risk of the sold options whenever the value left in them no longer is worth the potential gain to you to keep them on. Sold options are fine, they help pay the freight of owning protection, but as pointed out above, things can "change". Stay in touch and make sure we know when to lift those, or take profit by rolling down, or raise the floor by rolling up. Evey day has a new twist, so make sure we are ready to take advantage of "surprises".

We started a new feature this year to help "track" some options and their premium cost. These are not recommendations, just examples of some strike prices with corresponding futures month prices. By looking at these every month, we should get a feel for time value decay, as well as some sense of volatility depending on price action. If you like this, or want more, let us know. You can always get updated information by calling us, but this should give us some historical reference to look back on through the year. With each newsletter archived, you can follow these price relationships all year long.

Futures close, 3/30/12    July:   $6.34 1/2                         September: $5.60 3/4                                   December:  $5.43 1/4


                            July put options:                              September put options:                                   December put options:


$6.50                                    27   cents                        $6.00      62 3/8 cents                                  $6.00          80 3/8 cents                     

$6.00                                 12 3/4 cents                        $5.50      31 1/2 cents                                  $5.50         47 5/8 cents

                                                                                  $5.00      12 1/8 cents                                  $5.00          23 5/8 cents

From  the technical side, we have the following numbers from our computer to consider:
July  Corn                Support                 Resistance
                                 6.02                      6.47
                                 5.60                      6.74

                                 5.54                      6.99

July Beans                 14.46                     15.23

                                13.85                     15.85                               

                                13.26                     16.49

In conclusion, there is no reason to be wordy or cute, we live and market in volatile times, with huge risk and reward every day. There are many "surprises", and things we dont like to deal with like the cattle market right now. One can only wonder what would happen if the media came out with a story on ethanol compared to the story on Lean, Fine Tectured Beef that helped break cattle prices, or the recent discovery of a BSE positive dairy cow at a rendering plant, that inspired lots of video of stumbling and sick animals that all came from the UK. Not exactly responsible journalism, but the net effect was a lot less profit for those producing cattle. If you dont think it can happen, ask someone who has lived that nightmare. It isnt fair, it isnt right, but it happens. We have to try and be prepared for it as best we can, and be thankful we have the opportunity to try. Remember the end of the month, and say "thanks" at least, to those who have served and been willing to give all that we can have these opportunities. Memorial Day is a holiday, we will take that monday off of work. "Thanks" to all of you and your families that make that possible.

Important dates to remember:

 May 10th Supply/Demand Report, and Crop Production

Weekly Export Sales every Thursday

May 18  Cattle on Feed

Crop Progress every Monday, 3:00 pm Cental Time

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