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BRIAN HOOPS

By Staff | Jun 11, 2010

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.

In fact, producers should roll these put options to higher strike prices if the market continues to rally. 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. 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 analysis

Corn closed the week $.19 lower. Last week’s crop progress report showed national good-to-excellent ratings were 76 percent, up 5 percent from a week ago with Iowa at 74 percent g/e, Nebraska 84 percent, Minnesota 92 percent, Illinois 73 percent and Indiana at 69 percent. Only 4 percent of the crop is rated either poor or very poor. Last year’s ratings were 70 percent g/e and only 4 percent p-vp. Corn emergence stands at 85 percent.

The weekly export sales report showed net sales of 198,700 metric tons for delivery in 2009/10 – a marketing-year low – were down 81 percent from the previous week and 84 percent from the prior four-week average. Increases reported for Japan (267,600 MT, including 143,300 MT switched from unknown destinations and decreases of 6,600 MT), South Korea (70,800 MT, including 55,000 MT switched from Japan and 9,000 MT switched from unknown destinations), Saudi Arabia (40,700 MT, including 36,900 MT switched from unknown destinations), Israel (36,000 MT), Mexico (34,500 MT), Venezuela (23,200 MT), and Tunisia (22,300 MT).

This year’s export profile is now at 1.765 billion bushels versus the USDA forecast of 1.95 bb.

Strategy and outlook: Producers should be 100 percent sold in cash/hedges for the 2009 crop. 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.

The next sales objective for corn producers is the 50 percent retracement level of this last down move. Producers should look at buying new crop put option protection and add to cash sales at this level.

Soybean analysis

Soybeans closed the week $.02 3/4 lower from last week. The USDA reported 74 percent of the 2010 soybean crop has been seeded, ahead of last year’s pace of 63 percent pace, but slightly behind the five-year average pace of 75 percent seeded. Iowa is 91 percent completed, with Illinois at 73 percent, Indiana 70 percent, Nebraska at 85 percent and Minnesota at 95 percent finished.

The weekly export sales report showed net sales of 135,000 MT for delivery in 2009/10 were down 23 percent from the previous week and 55 percent from the prior four-week average.

Increases were reported for Mexico (57,200 MT), Turkey (20,000 MT), Venezuela (20,000 MT), unknown destinations (17,400 MT), and Taiwan (11,900 MT). Decreases were reported for Japan (500 MT). Net sales of 13,100 MT for delivery in 2010/11 were for Mexico (10,300 MT) and Japan (2,800 MT).

Exports of 149,100 MT were up 3 percent from the previous week, but down 34 percent from the prior four-week average. The primary destinations were Mexico (75,100 MT) and Japan (52,100 MTS).

This year’s export profile remains well ahead of last year’s record pace at 1.412 bb versus the USDA forecast of 1.455 bb.

Strategy and outlook: Producers should be 100 percent sold in cash/hedges in the 2009 crop. 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 at the $9.87 level.

The next sales objective for producers is the 62 percent retracement level of this last down move. Producers should look at buying new crop put option protection and add to cash sales at this level.

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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