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Uncertainty Spells Options in 2011

November 17, 2010

Approaches to market planning are as numerous as the farmers and advisers who use them. We asked the marketing advisers who will be presenting their outlook for 2011 at Marketing Rally in Chicago on Dec. 1 and 2 to rate the current markets from 1 (extremely bearish) to 6 (extremely bullish), tell us what they think might be the next “black swan”—the game-changing factor that blindsides everyone—and share their thoughts on the best marketing strategy for the year ahead. Here’s what they see as 2010 harvest winds down. We hope you’ll find food for thought and ideas you can use in your sales planning.


Advance Trading believes that in this environment, options are the answer. USDA’s bullish October report laid the foundation for market volatility for all crops over the next nine to 12 months. Upside potential is high, but there also is considerable downside price risk. Buying a put option sets a floor for inventory in storage or expected production but also leaves the upside open. If basis is favorable, you might make cash sales and buy calls.


The major issues and potential black swans to monitor in 2011 include: Acreage. U.S. corn producers need to plant about 3 million more acres in 2011; any less will result in higher prices. Yield. The U.S. has not had a catastrophic crop disaster since 1995. Even our genetically modified crops are not immune to extreme natural disasters. Ethanol. If the blenders’ credit is not reauthorized, we’ll likely see speculative deleveraging. Fund regulation. Any move by Washington to curtail the funds’ massive positions in grains or to broaden enforcement of the position limit rules would result in deleveraging and at least temporary deflation of prices. Use options strategies to protect against a price decrease.


The key issue over the next year will be the impact of the declining value of the U.S. dollar. It will be positive initially because it makes our commodities cheap and leads to higher exports. Long-term, foreign countries eventually will stop buying our debt. This, in turn, will lead to a lack of growth in China, lower demand for commodities and lower energy prices. Where will that lead corn and soybean prices?


The biggest issue for crop producers in 2011 is complacency. Prices are back to 2007–08 levels and it’s easy to think they will remain high throughout the acreage war of 2011 and anyone can make money.

There are plenty of downside risks, ranging from ethanol demand being torpedoed to a 1930s-style trade war developing via currency manipulation or old-fashioned trade barriers. A rapid exodus of spec-fund money could occur without any change in the underlying crop fundamentals. The cause could be regulatory or because the stock market or real estate suddenly looks attractive.

Managing margins is critical, maximizing the spread between total production costs and the sales prices received. A plunge in market prices without a corresponding drop in inputs can ruin a promising year.

A standard markup selling strategy will keep you out of trouble but potentially leave $500,000 on the table. Producers need advisers who have international contacts and insight into the behavior of investment funds and money flows.

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FEATURED IN: Top Producer - Top Producer Mid-November 2010

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