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BRIAN HOOPS

By Staff | Jul 26, 2013

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 you marketing objectives and goals, stick to the plan.

Your plan should have prepared you for a price rally on weather concerns, now stay the course.

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 and they will sell the puts they had previously bought for downside protection, only to find out later that it would have provided a valuable price floor.

Keep puts in place until proven otherwise. In fact, producers should roll these 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 and 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 if you are growing a bin-buster.

In summary, 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 $.08 1/2 lower. Last week, private exporters announced sales of 120,000 metric tons of U.S. corn to an unknown destination.

In the weekly export sales report, new crop corn sales were 62.6 million bushels, a strong total thanks in part to big sales to China last week.

In the weekly crop progress report, the national average crop rating at 66 percent good-to-excellent, is down 2 percent from last week.

The report also showed that the crop is 16 percent silking. This compares to 67 percent last year and a five-year average of 35 percent.

Given the right growing conditions, the USDA’s projection of a 14 billion-bushel crop looks to push harvest lows to major weekly support of $4.72.

There is enough crop problems and uncertainty to limit the downside risk for corn.

Additionally, demand will look to improve as we get closer to harvest as foreign buyers will try to time the harvest lows to gain forward coverage.

This corn crop has a long way to go to reach 14 bb as much of the crop nationwide is well behind schedule, meaning a lot of harm can come to the crop yet this year.

Strategy and outlook: Producers are now 100 percent sold of 2012/13 crop and are also 50 percent sold of the 2013/14 crop.

Producers own December corn puts on 50 percent of 2013 production. We will look to buy at-the-money calls if weather turns adverse.

SOYBEANS ANALYSIS

Soybeans closed the week $.16 3/4 higher from last week. Last week, private exporters reported sales of 165,000 mt of U.S. soybeans to China.

In the weekly export sales report said sales were decent at 21.7 mb.

The crop progress report showed the soybean crop rated at 65 percent -t-e, down 2 percent from last week.

The June NOPA crush rate was 119.05 mb, 2 to 3 mb above trade expectations. The soybean crop is made during late-July and August, which means it will need good rains during this time frame to reach maximum yield potential.

Currently the USDA is forecasting a record large crop that will need perfect growing weather to be achieved. Normal weather during the last half of July will push prices lower as a huge, record large crop will be realized.

The soybean crop is way behind normal due to the late-planted nature of the crop. Perfect weather can happen, but be prepared to react if weather is adverse over the next six weeks.

Strategy and outlook: Producers are 100 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. Sell 10 percent at $13.45 against the January contract.

Producers own November puts on 50 percent of 2013 production.

We will be quick to buy calls to protect sales if weather turns adverse.

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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