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 formulated a very simple, but effective marketing plan for livestock and grain producers.
I want to share this marketing plan with you.
For grain producers, the plan is very simple and 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 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 20 of the last 28 years and November soybeans have been higher on May 1 than on Nov. 1 in 18 of the last 28 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 2013 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. 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 $.06 1/2 lower. Last week, private exporters announced a 120,000 metric tons of new crop corn sale to an unknown destination.
In the weekly export sales report, corn sales totaled 16.4 million bushels. This is above the 8.7 mb that is needed to stay on pace with the USDA forecasts of 800 mb.
Last week, the USDA issued its first national corn planting progress report. Nationwide, only 2 percent of the corn crop had been planted compared to 16 percent last year and 7 percent on average. With cool and wet forecasts, there is no way for the U.S. to fall further behind in corn seedings. Texas is 56 percent complete. Corn broke through key technical support and closed sharply lower under the weight of fund selling as they attempt to liquidate long positions.
A weather threat during growing season is the only hope for a corn rally.
Strategy and outlook: Producers are now 80 percent of 2012/13 crop and are also 40 percent sold of the 2013/14 crop. They re-owned 50 percent of the 2012/13 corn crop with July calls. Cover 50 percent of 2013 production with put options when December trades to $5.67.
Soybeans closed the week $.15 1/4 higher from last week. Last week, private exporters reported a sale of 110,000 mt of U.S. soybeans sold to an unknown destination.
In the weekly export sales report, soybean sales were 20.8 mb. This is well above the 0.7 mb that is needed to stay on pace with the current USDA forecast of 1.350 billion bushels. NOPA reported March soybean crush at 137.1 mb, which was up slightly from the February monthly crush of 136.3 mb, and was mostly in line with market expectations.
While March crush was down 2.5 percent from last year, it was still sharply stronger than the USDA’s 2012/13 annual estimate reflects. Soybeans have fallen to the winter lows as private export sales of soybeans has slowed and South America’s harvest pressure has gained steam.
The commercials are buying the weakness, a good sign of a summer rally that will occur during the U.S. growing season. Look for long-term support on the weekly charts to hold as this is the point where commercial buying should increase and gain strength.
For producers wanting to re-own previous sales, this is an excellent opportunity.
Strategy and outlook: Producers are 80 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. They re-owned 50 percent of 2012/13 production with July soybean calls.
Cover 50 percent of 2013 production with put options when November trades to $12.51.
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.