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BRIAN HOOPS

By Staff | Dec 14, 2012

Last week we recommended to take advantage of the lack of carry and the abnormal inverse structure of the market to liquidate inventory and re-own on paper.

For some producers, that doesn’t work for tax or cash flow or some other limitations. For producers who made the decision to store some or even all of their inventory from 2012, whether it is in commercial or private storage, there is a great marketing strategy to get paid for that storage.

Selling call options is a great marketing strategy to use during the normally quiet winter months. This is especially true for corn this year as demand is terrible and won’t likely improve anytime soon.

Therefore, the upside for corn is likely limited until weather in the United States becomes a major factor in pricing influence this spring. The downside for corn is also likely limited as the corn market is in tight supply and this support should be enough to keep corn from free falling.

The cost of commercially storing corn is 3 cents to 5 cents per month. If you store at home, you save that cost, but there is also the cost of interest whether you store commercials or on the farm. Therefore, in order to recoup that cost, look to sell out-of-the-money call options to “reimburse” yourself for that cost.

For example, May corn is trading around $7.35. If you sell an $8 May corn call, you can reasonably expect to get about 20 cents for the option. If May corn does not rally above $8 by expiration on April 26, 2013, you get to keep the 20 cents and thus have earned some extra premium for your crop.

If corn rallies, it must rally above $8.20 (strike price plus premium) before you would be in a position where you could lose money. Thus, corn has to rally 85 cents, which is what you want to happen anyway, before you are in a position where your upside becomes limited.

Selling July or summer month calls is not advised as weather during the growing season makes this strategy too volatile to be effective.

CORN ANALYSIS

Corn closed the week $.10 3/4 lower. Last week, private exporters did not report any private sales.

In the weekly export sales report, corn sales shows 10.4 million bushels slated for 2012/13. This is below the 23.7 mb that is needed to stay on pace with the USDA forecasts of 1.15 billion bushels.

Corn looks to remain in a trading range as supply issues are well known by now and the demand puzzle moves to the front of pricing. The lack of exportable corn demand looks to cap rallies, while the downside should be limited with lack of supply due to the summer drought keeping the basis tight in most regions.

CONAB estimated corn production in Brazil at 71.9 million metric tons in a range of 71.6 to 72.9 mmt.

Informa’s updated South American crop estimates feature Argentine corn production at 27 mmt, down 1 mmt from previously, and Brazilian corn production of 66.2 mmt, is down 600,000 mt from its prior report

Producers should look to re-own sales on weakness to the $7.10 area and reward the market with cash sales into resistance.

Strategy and outlook: Producers are now 80 percent of 2012/13 crop and are also 40 percent sold of the 2013/14 crop. Re-own 50 percent of the 2012/13 corn crop with July calls if futures touch $7.12.

SOYBEANS ANALYSIS

Soybeans closed the week $.33 1/2 higher from last week. Last week private exporters reported 115,000 mt of U.S. soybeans sold to China.

In the weekly export sales report, soybean sales were 42 mb, above the 8.5 mb that is needed to stay on pace with the current USDA forecast of 1.345 bb.

Last week, CONAB, the Brazilian equivalent of the USDA, estimated the 2013 Brazilian soybean crop at a record large 82.6 mmt with the range of production being 80.1 to 83 mmt with normal weather.

Informa estimated Argentine soy production of 58.4 mmt, down 1.1 mmt; and Brazilian soy production of 81.4 mmt, up 150,000 mt from a month ago.

Prices will need to close above weekly resistance of $15.71 to confirm seasonal lows are in place. This was previous support that was broken and will serve as resistance on rally attempts. Producers can re-own sales if support is reached.

Strategy and outlook: Producers are 80 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. Re-own 50 percent of 2012/13 production with July soybean calls if futures hit $13.50.

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. He can be contacted at 605-660-1155.

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