Marketing strategies for selling 2012 and 2013 crops
A marketing plan should be written down to give focus. First, outline fundamental and technical assumptions and decide what marketing tools you will use—cash, futures or options. Establish price targets and a time frame for action. Many coaches will tell you a game plan must evolve, but you still need a strategy for how to play, instead of just showing up and saying, "I’m ready!"
There is significant risk for soybean stocks to build to more than 400 million bushels this year. If this does occur, be prepared for the following: 1) cash basis levels to widen at harvest; 2) some carry to come back into the market; and 3) flat price to move below the average cost of production for many producers.
Start selling 40% of your anticipated production via cash sales in March. For the next 40%, buy $1 deep-in-the-money put options if and when November 2012 soybeans test the target prices listed below:
- Buy 10% at $12.50 or by March 15.
- Buy 10% at $12.65 or by March 15.
- Buy 10% at $12.75 or by June 15.
- Buy 10% at $13 or by June 15.
The remaining 20% of your soybean production should be sold this summer using short November 2012 futures on violation of a trend-line support.
Consider selling 2013 soybeans only if the weather causes soybean prices to rally this summer. If Novem-ber 2012 futures test the $14 level, sell November 2013 soybeans in short futures with no restriction on cash-flow exposure.
As an alternative to selling futures, buy 2013 options:
- Buy a 2013 $12.60 put and sell a 2013 $13.60 call for 20% of anticipated production when November 2012 tests $14.
- Buy a 2013 $13 put and sell a 2013 $14 call for 40% of anticipated production when November 2012 tests $14.50.
- Buy a 2013 $13.50 put and sell a 2013 $14.50 call for the final 40% of anticipated production if November 2012 tests $15.
- Soybean acres will slightly increase by 1 to 2 million acres in 2012.
- Soybeans will move back to trend-line yields.
- While South America had some weather problems, assume slightly reduced yields.
- China will continue to buy soybeans, but not excessively more than 2011 levels.
- Soybean meal will continue to be the drag on the overall crush margin for soybeans.
- $13 should see serious overhead resistance for new crop November soybeans.
- Based on the seasonal charts, expect a bounce to the upside in old crop from February to May.
- A move back to 2011’s high will only happen if the risk of soybean yield goes below 40 bu., which won’t be realized until July.
- Use time restrictions if price targets are not met.
Types of Sales
- Sell 40% of production via cash starting with the first 5% in March at $12.20 basis the futures and continuing every 10¢ increase by mid-May and mid-July. Place stops below the cash market to trigger the sales based on time, not price.
- Sell the next 40% via in-the-money puts at $12.20 to $13.
- After mid-June, sell the last 20% via short November 2012 futures. Make sales on violation of technical support.
2012 total estimated marketing bushels: _________________
40% =______________ cash bushels. 40% =______________ put bushels.
20% = ______________ futures bushels.
Crop insurance bushels: ______________________
My outlook for the corn sector this year revolves around building supply and stable demand, resulting in an increase in carryover. Take decisive action sooner rather than later based on strong prices. Historically, three bull years in a row because of yield decline is an abnormality.
My strategy is based on the fact that in 21 out of the past 27 years, the December corn price was lower during the first week of October compared with the first week of March.
In the 21 winning years, the total gains far exceeded the total losses. It should be noted that three of the six losing years when we sold early were 2008, 2010 and 2011.
Ethanol demand growth will start to level off, corn exports will remain strong but tempered by price, and wheat will grow as a feed source. This implies that supply will become a more dominant factor in price. After two strong price years, a trend toward demand rationing and new supply sources has begun. A multiple-year low should be expected by the fall of 2013 and then a retest of historical highs no earlier than the summer of 2015.
Cash sales. If your elevator will allow you to roll cash contracts forward, start by selling the September contract and holding the position to first notice day and then roll to the December contract. Hold the December contract to first notice day and then roll to the March contract. At that time, cash can be delivered or the final roll to July should be made in late February. If this is not an option, sell the month you’d like to deliver against and then contact a marketing representative about trading a bear spread in the futures market to capitalize on the spread movement.
- March 2012