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DAVID KRUSE

By Staff | Mar 18, 2011

I told ISU Climatologist Dr. Elwynn Taylor that we were able to plant corn under excellent conditions in mid-late April last year, asking him what to expect for planting conditions this spring.

He noted that we were seeing extreme oscillations in temperatures and that if we were able to plant in mid-April in good weather conditions that he would be worried because the next cold oscillation may catch the crops with the kind of unusual freeze that recently wiped out the Mexican tomato and corn corps.

I guess that we are supposed to hope that mid-late April is cold/wet so the temperature oscillator warms up in May. Either way, I didn’t take it that the planting season would go as well as a year ago.

Weather forecasts are really about statistics and weather events are measured by percentage odds of occurrence. If there is no drought this year, we will extend 800 years of weather history recorded in tree rings as the longest period between Midwest drought has been 23 years during that time and the last major Corn Belt drought was in 1988, 23 years ago.

As we have informed subscribers, world grain/soy stocks are universally tight. There is no surplus of anything, so there is no slack in production capacity of one crop available to expand production of another.

This is the most critical year of production relative to supply/demand ratios in my lifetime. The farmer will step up to do what he can to achieve maximum food production, but the success of crops is not determined entirely by farmers.

A few weeks ago those that monitor the La Nina noted a plume of warmer Pacific water off Northwest South America and a decline of several points in the Southern Oscillation Index and declared the La Nina peaked, having begun to fade into remission. Today, the SOI surged back to its highs so the reported death of this La Nina was premature. This has been the third strongest La Nina on record and the last time one strengthened in March was in 1974. It did not bode well for the following crop season.

I’m buying at least 80 percent revenue crop insurance coverage with the harvest price option along with the Biotech Yield Assurance option where applicable to get up to 90 percnet APH coverage. I am not a crop insurance specialist, but my partner Rod Peterson is the best there is.

La Nina threatens bushels so crop insurance is the only way to insure those. $6.01 is the guaranteed price and that could prove to be poor price insurance against the market risk. ISU Grain Market Specialist Bob Wisner set $7.42 as the price target for Taylor’s La Nina weather scenario, targeting a 147 to 148 bpa yield. There have been years with burdensome carryovers when the market response to yield risk was muted because of the large supply.

This is not one of those years. Stocks are so tight that yield risk will be amplified by the markets. Bull call spreads should be a very effective tool to harvest yield risk in the corn market.

End-users without risk management protection in place are not risk managers. So they should not complain about feed costs if a weather threat does materialize as feared related to the La Nina.

The global crop weather that has been seen has correlated quite closely to what typically occurs associated with a La Nina. MERC economists note that in the 1974 La Nina that the yield was 16 bpa below the trend line. That would equate to a 145.7 bpa yield today so they are adding a couple bushel for improved genetics since 1974.

Taylor argues, however, that plant scientists have not reduced the amount of water necessary to grow corn with genetic improvement. Drought resistance has not changed a great deal. There are drought tolerant hybrids coming, but even they have just marginal improvement. So it is a real wild card to expect a trend line yield if the SOI doesn’t do an immediate about face and a hurried retreat south.

With a 40-week cycle low due in corn this month, weakness in futures would provide an opportunity to add to bull call spreads recommended in corn.

For those not experienced with such option strategies, a bull call spread is buying a call near the money while selling an out-of-the-money call. The price received for selling the higher strike price call pays for the time value. This creates a window of price profit opportunity while limiting the risk to the net cost of two calls, bought and sold.

If the La Nina bears up the tree ring study (Farmer Benner drought cycle), to produce a 147 bpa below trendline corn crop, then unfortunately, a portion of the demand base for corn will not be supplied and the process of the market determining who that will be will follow this summer/fall. You want your customers to pay you all that they can, but charging them so much that they go out of business is not a successful positive outcome.

The destruction of a portion of the demand base would produce a bear market following the bull. Risk management should start this year with high coverage of revenue insurance with the harvest price option election.

It doesn’t matter what the price is if you don’t have bushels to sell and if the La Nina sticks around, the odds are that many producers will grow short crops. With tight stocks this year, however, markets should be extremely sensitive to production risk.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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