It’s not too late to formulate a marketing plan for this year’s growing season. Before I became a market advisor, I was a vice president of an Iowa bank. During that time, I worked with many borrowers on marketing and formulated a very simple, but effective marketing plan for livestock and grain producers. I want to share this marketing plan with you.
For grain producers the plan is very simple and involves the use of put options. The plan calls for producers to buy put options to cover the downside risk on new crop inventory they do not have pre-sold. This can vary from producer to producer, ranging from zero percent to 100 percent, and works for either corn, or soybeans, or both or for any other commodity.
Producers are encouraged to buy put options at planting time. For corn, this would normally occur around April 15 and for soybeans around May 1. There is a strong reasoning behind buying the puts at this time of the year.
First, from a seasonal stand point, prices in the spring are normally higher than in the fall. In fact, December corn has been higher on May 1 than on Dec. 1 in 17 of the last 25 years and November soybeans have been higher on May 1 than on Nov. 1 in 15 of the last 25 years.
Second, after the crop has reached 50 percent seeded, the market is inclined to add or subtract weather premium from prices. This means that prices will have likely already reached their spring high by the time producers have seeded half of their crop, unless weather problems develop during the growing season.
Third, option values normally increase into the summer as volatility increases and options traders will demand a higher premium for the options. After producers have covered their downside risk with put options, the marketing plan is essentially finished. Producers can, and should be, encouraged to roll these options to higher strike values if market conditions warrant during the growing season.
To finish the marketing plan, producers should only remove these put options once seasonal lows are established.
Normally, these seasonal lows are in place during the harvest. Thus, producers should remove the put options when the combines begin to roll in the fall. This will keep the put options in place during the entire growing season.
In theory, the option plan is the ideal marketing plan as it will have established a minimum price at a seasonal high and have left the upside open in case weather problems do develop during the growing season.
Producers will also have bought put options at a reasonable price, before summer volatility increases the prices of the options. This may be the perfect marketing plan for the 2008 growing season as the fundamentals for corn and soybeans are bullish and upside potential could be large if weather problems develop.
For livestock producers, the plan is more simple. Whenever a producer buys a group of feeder pigs or feeder cattle, a put option should be bought to establish a minimum or breakeven price and leave the upside open.
This will protect the producer from losing money because of poor market prices, and at the same time create the opportunity to benefit from higher prices.
Sometimes we make marketing too hard and end up doing nothing. With this plan, producers can establish a minimum price level for their products while still benefiting from higher prices.
It is simple and cost-effective, and a highly valuable marketing tool.
Corn closed the week $.00 3/4 higher. The weekly export sales report showed net sales of 1,214,300 metric tons were up 40 percent from the previous week and 11 percent from the prior four-week average.
Increases reported for unknown destinations (425,000 MT), Japan (317,000 MT, including 56,300 MT switched from unknown destinations), Mexico (141,000 MT), South Korea (116,900 MT), Venezuela (91,400 MT), Syria (44,000 MT, including 42,000 MT switched from unknown destinations), and the Dominican Republic (20,500 MT), were partially offset by decreases for Panama (3,000 MT), the French West Indies (2,900 MT), Guatemala (2,800 MT), and Canada (1,600 MT).
Net sales of 69,500 MT for delivery in 2009/10 were for Guatemala (61,000 MT) and Honduras (8,500 MT). Optional origin sales of 60,000 MT for Egypt were exercised to export from other than the United States. For the marketing year, the U.S. has now exported 1.422 billion bushels of corn compared to 2.190 bb last year.
To reach the USDA forecast, the U.S. needs to export 13.3 million bushels each week. Last week, the USDA announced a total of 507,000 million tons of corn sold to various buyers including South Korea and unknown destinations.
Soybeans closed the week $.10 3/4 lower. The weekly export sales report showed net sales of 617,100 MT were down 24 percent from the previous week, but up 9 percent from the prior four-week average. Increases were reported for China (186,300 MT), Mexico (88,200 MT), Iran (64,700 MT, including 63,000 MT switched from unknown destinations), Egypt (55,500 MT), Syria (45,600 MT), and Taiwan (45,500 MT).
Net sales of 824,200 MT for 2009/10 delivery were primarily for unknown destinations (582,000 MT), China (232,500 MT), and Mexico (9,500 MT).
This year’s export pace remains well above last year’s pace as the U.S. now has export commitments for 1.137 bb compared to 1.048 bb a year ago. The U.S. only needs to average 6.7 mb to reach the USDA forecast.
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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