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 formulating simple, but effective marketing plans for livestock and grain producers. I want to share this marketing plan with you.
For grain producers the plan 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 0 percent to 100 percent, and works for either corn or soybeans or both or 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 18 of the last 26 years and November soybeans have been higher on May 1 than on Nov. 1 in 16 of the last 26 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 2010 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 even simpler. 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 give him/her 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 $.18 1/4 higher as fund buying rallied the corn market off of technical support. The first crop progress report of the year, showed corn planting progress at 3 percent. This is just behind the 5-year average at 4 percent and below the expected pace; the market had been hoping for 5 percent.
Texas is over 48 percent completed with their corn seedings, while the main corn producing states are just getting started with their planting efforts. The USDA said last wee it will resurvey corn farmers in North Dakota and South Dakota to try to get a better picture of the 2009 harvest in those states.
Strategy and outlook: Producers should be 100 percent sold in cash/hedges. Producers should have purchased July options on a pullback into a support level on a portion of their 2009 production. 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 $.33 higher from last week. The March NOPA soybean crush was in line with market expectations. March soybean crush by NOPA members was reported at 149.6 million bushels.
This was generally in line with market expectations, however it is disappointing that March NOPA crush was up only marginally from last month’s 148.4 million bushels given the increase in crushing days in March versus February.
Strategy and outlook: Producers should be 100 percent sold in cash/hedges. Producers should have purchased July options on a pullback into a support level to re-own a portion of their 2009 production. 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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