CFGAG News and Views   vol. 37  August 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."

"A Real Disaster, Now What? "  Spring price for crop insurance is: Corn- $5.68, and Beans- $12.55

Yes, we are now looking at a disaster of 1988 proportions, and some say it is worse this year. As field scouts comb the fields, there is one horror story after another. While conditions in Indiana and Ohio have at least stabilized according to the crop condition report, crops in the west are now bearing the brunt of what seems a never ending story. This is not new news, just ongoing, and the bottom line is yields are still moving lower. The larger question is now, what will the price of corn and beans have to do to ration demand? Are we there, or do we have a long way to go? There are many opinions, lots of guesses, and tons of emotion at play now, so lets look at some things that we do know, and what we can look for in the coming weeks.

First of all, we have two "moving targets", the first is just how low will this years production be? Every week, the private "guestimaters" have weighed in with their prognostications, and each week they have been lower. Pretty good assumption given the lack of color on the radar screens. The fact is, they are only guesses, no one knows exactly what is or what is not out there, and we wont until we get some good harvest results, or the field is measured and destroyed. That is happening now, as some acres are being chopped for forage, or simply mowed or disked up. How many? We dont know, and will not until we are farther along in the process. The other "moving target", is demand destruction. Ethanol production has been dropping, as evidenced by the weekly production reports every Wednesday morning. Lots of country chatter has plants either slowing or shutting down, with more slated for "extended maintence". Lets pull out the balence scale and try to weigh these out.

On the left side, we have declining production, losing both yield and harvested acres.

On the right, we have:

1) Lower ethanol production

2) Liquidation in the livestock industry

3) Little, if any, export sales (last week saw net cancelations for both old and new crop)

4) Smithfield and Pilgrim's Pride announcing they are importing corn from Brazil

Price is the middle, so how do these factors weigh out in your mind? Are we high enough to ration what we might have? The targets are still moving, and as we said before, no one knows. It is up to the market to figure it out, and until the targets stop moving, it is going to be a choppy, wild affair. USDA will give us some new numbers to chew on a week from Friday, August 10th in the monthly Supply/Demand Report, and an update on Crop Productioin. Lots of private estimates will be out before then, and more fields will be examined, chopped, or harvested. More will be known, and producers will have to decide for themselves how high is high enough.

We want to empasize what we feel is the most important factor, net farm income, and examine what the unprecedented price levels have given us in terms of opportunity. Two weeks ago, we posted on the website a "2012 Crop Insurance Alert". We wanted to make everyone aware of what is now possible in terms of dollars/acre. The following are some steps to take in taking the emotion out of the equation, and looking at some ideas to make sure what we have been "given" is not taken away without some opportunity to protect it.

1) Make sure you know what level of insurance coverage you have, and if you have the "fall price option"

2) Compare the Spring Guarantee with the projected guarantee at current prices. Corn is now over $2.00 higher, and beans almost $3.00 

3) Ask yourself, "Do I think prices in October will be higher or lower than what they are now? (Fall price is the average price of December corn and November beans during October"

4) If you think they will be lower, then the only way to lock in this level of revenue per acre is to sell grain in some form, either cash, futures, or options. 

Timing is always a guess as well, but looking at some of the revenue projections with some of our clients reveals the possibility to lock in over $1,000 per acre gross in a disasterous production year right now. Each farm is different, and you may think we have a long way to go up. Many analysts  believe we do in fact have a lot more rationing to do. We prefer to focus on your bottom line, and how YOU feel, and not some "expert". Remember not too long ago some of these same experts were telling us to sell two years of production at $5.50? They do not pay your bills, nor will they make up any of the difference if prices suddenly move lower. Talk to your lender, your crop insurance agent, and us if you like to pull this all together. Everyone must understand that if prices move higher after you sell, that the top end is capped if cash or futures are sold, or if  call options are sold, and margin calls will accompany higher prices on sold futures and calls. The good news is, your lender should understand that any margin expense caused by higher prices should be offset by higher insurance payments, as long as coverage is present and the rules are followed. That is why we include the agent in the discussion with your lender, and repeat, make SURE you understand your coverage and any limitations before any decision is made.

We also remain cautious on issues like European debt, with Greece, Spain, and Italy now back on at least the middle burner. We also are watching threatening weather in Russia, the Ukraine, and Austrailia, while Canadian crops look extremely good. All these items are important, but money flow will still dictate price movement. We have heard differing opinions on "QE3" and how this as yet unknown "stimulus" may bring funds in on the buy side. We also heard that we should "watch out below" if none materializes. These are all factors, but what really matters is what price you deem as worthy of taking, and how much you are willing to spend to protect it or lock it in as the case may be. Give us a call to go over these and other ideas that may work for you.

Also, looking ahead to next year, we have some pretty good prices on the board now to consider, and some interesting spreads to watch as well. If we destroy demand enough, $6.40 for December 13 corn may not be a bad price. If we think back to last winter, $6.50 did the job of rationing. Also, if we have discouraged 3-4 billion bushels of demand, will it suddenly reappear next year?  Watch the Dec/July spread, now at an inverse of 20 cents, and ask yourself, with harvest likely to come very early with potential quality issues, how much of this crop will be sold early and how much will be stored? Throw in the idea that a lower percentage of this years crop has been sold early, and it is possible to project that producers may elect to move some grain right off the combine, especially if we are over $8.00 in corn and $16 in beans. As a producer myself, it will be very hard not to consider doing just that, transfering the worry of keeping grain in condition over time to someone else. Right now the spreads are calling for grain up front, and I figure many will hear that call and move on, putting this year behind them and gearing up for the next.

From  the technical side, we have the following numbers from our computer to consider:
Dec.  Corn                Support                 Resistance
                                 7.56                      8.43
                                 7.29                      8.70

                                 6.85                      9.14


Nov. Beans                 14.76                    17.52

                                 14.39                    17.89                               

                                 13.80                    18.48

In conclusion,  while we have been very short of those refreshing rain events this year, by using the tools of good farming practices, crop insurance, and marketing, we have much opportunity to prosper in a disasterous production year. No one that I know really wants to produce less, it is very discouraging and disheartening. That in itself is the attitude that makes us a great people, we just dont want to produce less. We feel like we have failed, when in fact, we have all done the best we could given the weather which we have no control over. While personally it may hurt a lot to see fields like we have this year,  it does not have to mean a financial disaster as well. Look over your situation, consult with your team of advisors, and see if any of these ideas will fit your plan.  

Important dates to remember:

 August 10th Supply/Demand Report, and Crop Production

Weekly Export Sales every Thursday

Export Inspections every Monday

August 17th  Cattle on Feed

Crop Progress every Monday, 3:00 pm Cental Time

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


R. J. O'Brien & Associates, LLC Disclaimer:
The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.