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.”
Another popular question is “what should I do with my inventory?” That question is a lot easier to answer as there are ways producers can protect themselves while maintaining upside potential.
Since making highs during the winter months of November, December and January, the grain markets, despite the fact the crude oil and the stock market has rallied to the old highs and even above them, have faded to test the winter lows.
A higher U.S. dollar has limited the buying interest of the grains as a higher U.S. dollar weakens the export markets for the U.S. Until a weather event emerges, prices appear headed for further price weakness. How quickly will the grains find a bottom that is meaningful and maintainable is a question asked by the traders, hedgers and end users.
Since no one knows with certainty if the grain markets have bottomed or when they will bottom, producers should consider liquidating their remaining inventory and replace ownership with futures or options.
If producers want to be “bullish” of 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 25. Producer can buy a “near the money” July call option for approximately 22 cents. (This is about 8 cents cheaper than this time a year ago.)
Thus, producers can sell their inventory and use only approximately 10 percent of the proceeds to enable themselves to have upside potential through June 26. The producers who follow this strategy will have the following scenario: no downside risk, unlimited upside potential, 90 percent of the cash proceeds to pay expenses 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.
Producers can use this same strategy on new crop strategies as well.
Corn closed the week $.18 1/4 lower. The market is anticipating a larger seeded acreage figure in the March 31 USDA report and with the warmer weather, the market also seems to be anticipating more seeded acres this spring. Unless wet conditions during the planting timeframe limits the amount of fieldwork done this spring and curtails farmers planting plans, it looks as if U.S. farmers will seed at least 2-3 million more corn acres in
2010 than in 2009. Commercials added to their market length last week.
The weekly export sales report showed net sales of 606,800 metric tons for delivery in 2009/10 were down 19 percent from the previous week, but up 8 percent from the prior four-week average.
This year’s export profile is now at 1.326 billion bushels versus the USDA forecast of 1.900 bb.
Strategy, outlook: Producers should have hedges/cash sales up to the 70 percent level. Producers should have purchased July options on a pullback into a support level. Hedgers have sold a portion of the 2010 crop when December futures traded above $4.50. Next sales objectives for corn producers are when prices move above last spring’s highs of $4.73.
Producers should look at buying new crop put option protection and add to cash sales.
Soybeans closed the week $.09 3/4 lower from last week. February Census soybean crush was reported at 153.8 million bushels, right in line with expectations of 153.8 million, the range of estimates was 153.0-155.5 million bushels and was up 13 percent from year ago crush of 135.4 million. January crush was 167.2 million. This brings marketing year-to-date crush to 940 million bushels, up nearly 12 percent from last year.
Last week, the USDA reported a private sale of 120,000 mts of soybeans to an unknown destination, which will undoubtedly be switched to China. The weekly export sales report showed net sales reductions of 273,400 MT for delivery in 2009/10 were up 28 percent from the previous week and up noticeably from the prior four-week average.
This year’s export profile remains well ahead of last year’s record pace at 1.330 bb versus the USDA forecast of 1.420 bb.
Strategy, outlook: Producers should have hedges/cash sales at the 70 percent level. With the tight basis levels and lack of carry in the market, the market is telling producers to sell the product now and use price weakness to re-own the crop with futures and options. Producers should have purchased July options on a pullback into a support level. Producers have sold 2010 crop when November futures traded above $10.30 and should wait patiently for a rally to make new sales and purchase put options.
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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