CFGAG News and Views vol. 39 October 1, 2012
"There is a risk of loss when trading futures and options. The thoughts and opinions 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."

"Another USDA Surprise"

It would seem that every month we report on another shocker from the USDA that inspires a limit move in market prices. Last Friday, in the Quarterly Grain Stocks Report, corn and wheat stocks were less than expected, and prices rallied. Bean stocks were surprisingly high, but after struggling lower, moved higher when corn touched limit up. While recent yield reports may indicate much better than expected yields it did not matter to the bulls in the corn pit, as "expectations" were for more stocks, not less.  I want to touch on the word "expected", as this may help us doing a better job of preparing for these reports, and managing our risk more effectively. The reason I want to do this, is I caught myself this time not prepared for a limit up move in corn, as "expectations" were for this report to be a yawner. I "expected" the October 11 Supply/Demand Report to be the game changer if there was going to be one at all, and everything I read and listened to convinced me that the Stocks report really didn't matter. So much for "expectations".

Expectations are a product of some facts, some assumptions,  some speculation, and some emotion. The proportion of facts to assumptions,  speculation, and emotion go a long way in "getting it right". I cannot count the number of calls we received from folks convinced the government would get prices down before the fall insurance price was calculated, thus saving millions if not billions in insurance pay-outs. From my seat, it sure looked like a big fund long position, some better than expected corn and bean yields as harvest moved north, and corn demand showing some real destruction as export sales are near zero, and a 750,000 metric ton buy from Brazil was announced last week, sure made it easy to "expect" prices to continue lower. These ideas were either priced in to the market already, or we may have more "surprises" to come. The question now is how do we prepare for the October 11 report, and the coming year. Here are some bullet points to consider:


1) National yield is now estimated at 123. Will it be higher or lower on the next report?

2) Ethanol production dropped last week after staying realtively stable for a few weeks. Did friday's report and price action tip the scales to get out?

3) Crude oil over $90 implies that $7.00 corn is realistic. To be worth $8, we would have to be over $100/barrel.

4) South American weater has improved to allow more early planting, but will be closely monitored for any major problems

5) Money flow: there are still lots of open interest in December corn and November beans. Where will they go?

There are also some questons about actual planted acres verses the March intentions, with some indication that they will be higher in both corn and beans. Harvested acres also are in doubt, as many point to the relatively low percentage of abandonment, and say those should be much higher given the number of "zeroed out" acres, especially in corn. Bean yields seem to be much better than expected, but have we priced that in with a $2.00 + drop in price? How will USDA look at crop size, export demand, and feed use in this next report? The bottom line is, what is the carryout projection, is it getting bigger or smaller, and will further "rationing" be needed.

So how to prepare? A simple fact is that $7.50 corn and $16.00 beans are still very good prices. Do we "expect" higher prices in the next few weeks or months? Do we expect the financial difficulties around the globe to be solved soon? Do we assume that after the election on November 6 that both parties will get together an keep us from going over the fiscal cliff? Are our emotions kicked in after watching corn drop over $1.50 and beans over $2.00? Do we assume that next years prices "have" to be higher than the present, just because they were this year? All these questions make me wonder if I have enough downside protection. It was not that long ago that USDA "lost" 300 million bushels, and a few weeks later "found" them. I will limit my "expectations" in this report, while feeling confident that bean yields will go up, I will not "assume" that prices have to fall, as the market may have priced the increase in. My focus will be on net farm income, and if sales are warrented or options purchased before the report. I have to keep looking at my bottom line and what these prices mean, and avoid listening to the latest "talking head" trying to make my mind up for me.

For those utilizing the option stratey we outlined on the home page, having bought the $8.00 Dec 12 put, and selling the Dec 13 $7.00 call, if you feel the market is ready to go higher, rolling down the $8.00 put on any weakness this week may be something to consider. It moves the floor down while capturing some of the gain, and if prices rally further, your insurance calculation will be higher. Remember, we initiated this position to protect insurance revenue that was substantial at $8.00 corn, so taking that off before October 11 is reassuming that risk. Call us to make sure it is what you want to do.

From  the technical side, we have the following numbers from our computer to consider:
Dec.  Corn                Support                 Resistance
                                 7.09                      7.76
                                 6.84                      7.93

                                 6.60                      8.18                

Nov. Beans                 15.20                    16.47

                                 14.53                    16.74                               

                                 13.97                    17.02


As harvest wraps up in your area, keep an eye on basis levels, as some early harvested areas are already showing improved basis. With the early finish, and short crop, we may get some really good bids before year end. Many will want to avoid more sales in this calendar year for tax reasons, and available for delivery may be very limited in November/December.                           

In conclusion,  as harvest continues, we hope and pray for safety, better than expected crops, and good weather to get it in. For some, it will be the worst crop in history, and for some, the highest levels of income ever achieved. The huge variance in production has made overall crop determination to be quite challenging, and probably made it more difficult to "assume" and "expect" anything. Keep in touch to go over individual needs prior to the 11th, and make sure you have covered what you want and need. As per expections and emotions, my grandfather probably said it best when he told me, "it is never as bad as you think, and it probably isnt as good as you think". By this he was saying not to get too emotional, don't let your assumptions and expectations overwhelm the facts. Pretty good advice from one the smartest men I ever knew.  

Important dates to remember:

 Octobe 11th Supply/Demand Report, and Crop Production

Weekly Export Sales every Thursday

Export Inspections every Monday

October 19th  Cattle on Feed

Crop Progress every Monday, 3:00 pm Central Time

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