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By Staff | Apr 3, 2009

One of the most popular questions we receive at our offices here at Midwest Market Solutions over the course of the winter has been, “how low are prices going?” While this may be a popular question, it doesn’t necessarily mean this is the correct question to ask. The honest answer is, “no one knows with absolute certainty.”

Since making a new all-time high in June of 2008, the grain markets, the stock market and the crude oil market have almost been in tandem with each other. Prices have been in a steady downtrend as the economic situation has turned more severe with each passing month. The economic crisis is not only confined to the U.S., but also to the world. As world economies suffer, U.S. commodity prices also suffer as the foreign buyers we count on to purchase our products, do not have the money to make their normal purchases.

A higher U.S. dollar also weakens the export markets for the U.S. Until recently, prices appeared to be for further price weakness. Have grains, crude oil and the stock market found a bottom that is meaningful and maintainable or is this rally a selling opportunity.

Since no one knows with certainty if the commodities and equity markets have bottomed, producers should consider liquidating their remaining inventory and replace ownership with futures or options.

If producers want to be “bullish” on corn, soybeans or wheat; they can use the money they will save in storage and interest costs to “re-own” with call options.

For example, July corn call options have approximately 87 days of time value until expiration on June 26. Producer can buy a “near the money” July call option for approximately 30 cents. Thus, producers will have sold their inventory and used only 10 percent of the proceeds to enable themselves to have upside potential through June 26.

The producers who follow this strategy now have the following – no downside risk, unlimited upside potential, 90 percent of the cash proceeds and have eliminated all storage and interest charges.

Since the cash inventory is sold, there is no downside price risk. Producers pay the cost of the option when they purchase the option and have no other costs involved with managing that option. From the selected strike price of the option, producers have the opportunity to add value to their cash sales if prices move above this price level. Since producers have only used 10 percent of the sale proceeds, they are able to use the remaining 90 percent to pay debt, stop interest or for general cash flow purchases.

With the inventory now sold, there are no charges for storage and interest charges will also stop once any loans securing the crop have been repaid.

The best reason to follow this strategy is peace of mind. Once the crop is sold, there is no reason to worry about the condition of the crop or the fluctuating markets.

Corn analysis

Corn closed the week $.09 1/2 lower. The weekly export sales report showed net sales of 1.2 metric tons were up noticeably from the previous week and 72 percent from the prior four-week average.

Increases were reported for South Korea (481,000 MT, including 43,700 MT switched from unknown destinations), Japan (162,800 MT), unknown destinations (149,500 MT), Taiwan (142,300 MT), Venezuela (104,600 MT), and Mexico (49,300 MT). Net sales of 101,500 MT for delivery in 2009/10 were for unknown destinations (58,000 MT) and Mexico (43,500 MT).

For the marketing year, corn sales are 58 percent behind last year’s demand pace. The USDA has now exported 1.25 billion bushels of corn compared to 2.079 bb last year. To reach the USDA forecast, the U.S. needs to export 20.6 million bushels each week. Last week, the USDA announced a 116,000 million tons corn sale to an unknown destination and a 110,000 mts sale to South Korea. Rumors of Thailand possibly selling as much as 450,000 mts of corn into the open market has corn on the defensive. The upside for corn remains limited by large farmer inventories.

Soybean analysis

Soybeans closed the week $.35 lower. The weekly export sales report showed net sales of 428,800 MT were up noticeably from the previous week and 16 percent from the prior 4-week average. Increases were reported for China (251,300 MT), Mexico (100,900 MT), the Netherlands (65,000 MT, switched from unknown destinations), Egypt (45,000 MT), and Indonesia (35,000 MT). Decreases were reported for unknown destinations (131,700 MT).

Net sales of 111,500 MT for delivery in 2009/10 were for China (110,000 MT) and Japan (1,500 MT). This year’s export pace remains well above last year’s pace as the U.S. now has export commitments for 1.04 bb compared to 989 mb a year ago, or 7 percent better than a year ago. The U.S. only needs to average 7.0 mb to reach the USDA forecast. The USDA announced a bean sale of 110,000 mts to China. Harvest in South America has reached 40 percent completed in Brazil and 5 percent in Argentina. With the spread between new corn and new crop soybeans at 2.11, new crop soybeans remain too cheap for farmers to effectively plant this year. Prices need to rally to over the next three weeks to attract lost acres to corn.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.

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