With the weather and the grain markets starting to catch fire, volatility and pricing opportunities are increasing. Not only will weather forecasts change daily, but emotions and price levels will as well. The key to marketing successfully in this type of environment is to stick to your marketing program.
By now, you should have a marketing program in place and be well into the heart of your plan as the key pricing and growing season are upon us. If you were disciplined enough to write down your marketing objectives and goals, stick to your plan. Your plan should have prepared you for a price rally on weather concerns, now simply follow your plan.
If using put options for downward price protection, do not jump out the moment prices look like they are going to move higher. It is not unusual to see a market move higher on the beginning of a weather rally, only to fall apart if the weather rally fails.
Many producers believe this year will be the year we go back to $7 in the corn market and $15 in the soybean market. They will sell their put they had previously bought for downside protection, only to find out later that it would have provided a valuable price floor. Buy a put option for downside protection and keep it in place until proven otherwise.
As for short call or short put options where risk is unlimited, be sure to use risk management tools. A rule of thumb is that once the premium value doubles, liquidate the position. Remember, the markets will always be there, along with opportunities to re-enter. Riding a significant losing position can be difficult to manage monetarily and mentally. If you feel uncomfortable selling futures or forward contracting, use the puts more aggressively. That way, you leave your upside wide open, yet establish a minimum price floor and the limited loss potential will give you staying power until you need to remove the option.
If you have been an aggressive forward contractor of corn this year, do not be bashful about buying September or December out-of-the-money call options as safety valves. If you have forward sold soybeans, buy September or November out of the money calls for insurance. Over the next two months, if crop conditions deteriorate, the sky is the limit for grain prices.
As an example, spending 20 to 40 cents on an out-of-the-money call option in corn could return you dollars in a drought market. In addition, having calls in place may also give you the opportunity or confidence to forward-contract more new crop.
The start of a weather market has developed, and it can be very emotional. In summary, try and let the trend be your friend, but do not allow a market to rally and then watch it fall all the way back down before taking action.
Develop an in-depth strategy to approach the market and do not market by the seat of your pants. A good strategic, well thought-out plan will perform better than trying to outguess where prices are going, because no one really knows for sure what the weather or what prices will do.
Corn closed the week $.07 3/4 higher. The weekly export sales report showed net sales of 604,500 metric tons were down 20 percent from the previous week and 19 percent from the prior four-week average. Increases were reported for Japan (213,900 MT) and Mexico (161,900 MT). For the marketing year, the U.S. has now exported 1.61 billion bushels of corn compared to 2.353 bb last year. To reach the USDA forecast, the U.S. needs to export 11.6 million bushels each week. Planting is all but finished in the U.S. The USDA is now issuing good-to-excellent ratings on a weekly basis for corn.
As of May 31, the 2009 crop was rated at 70 percent g/e versus 63 percent a year ago. Iowa was rated 79 percent g/e, Minnesota was rated 77 percent g/e with Nebraska rated 89 percent g/e, Illinois rated 54 percent g/e and Indiana rated 65 percent g/e. Corn continues to find strength from the crude oil market, which has rallied over $30 per barrel over the last four months.
Soybeans closed the week $.41 1/2 higher. The weekly export sales report showed net sales reductions of 24,000 MT resulted as increases for Turkey (85,000 MT, including 61,300 MT switched from unknown destinations), Mexico (47,200 MT), Canada (7,400 MT) and Guatemala (4,100 MT), were more than offset by decreases for China (112,600 MT), unknown destinations (43,300 MT), and Japan (15,600 MT).
For the marketing year, the U.S. has now exported 1.24 bb of soybeans compared to 1.103 bb last year. The U.S. has already reached the USDA forecast. Planting progress is much slower than normal, but in the next two weeks, the U.S. soybean crop will be seeded. U.S. seedings have now reached 66 percent planted versus 67 percent last year and 79 percent on average.
Iowa is ahead of pace at 91 percent planted with Minnesota 89 percent seeded. The eastern Corn Belt with Illinois is only 34 percent planted with Indiana 50 percent planted. Seasonal highs are achieved by June 23 for soybeans.
Strategy and outlook (corn): Producers should have over 90% of their 2008 crop sold and/or hedged. The other 10% should be sold on a 20
to 30 cent rally or by the end of June. Producers should have managed their risk by placing new crop hedges as
December has reached the initial upside target of $4.25 to $4.50 range. A combination of cash sales, hedges
and put options are effective risk management tools. If the new crop December contract can rally to $4.75 to
$5.00, producers should look to raise protection levels by rolling the put options to a higher strike price.
Strategy and outlook (soybeans): Producers should have over 90% of their 2008 crop sold and/or hedged. The other 10% should be sold on a 40
to 70 cent rally or by the end of June. Hedgers should now be considering placing new crop hedges as November
soybeans have reached the long held target to begin a hedging program. A combination of cash sales,
hedges and put options are all viable marketing strategies to reduce price risk. If the new crop November contract
can rally to $11.50 to $11.75, producers should look to raise protection levels by rolling the put options to
a higher strike price.
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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