Why You Need to "Manage Risk" Instead of "Predict"
Jan 05, 2012
The "outside" markets bsically worked against us today. The grains saw some back and fill type action as traders digested news of improved US crop conditions and a little wetter South American forecast.
Not trying to re-play the same old song and dance, but right now the market is stuck in somewhat of a holding pattern awaiting the release of data pertaining to the end-of-year crop production numbers and any type of change in the South American weather forecast.
From everything I am hearing and looking at, the weather in Argentina and southern Brazil looks to remain hot and dry through the weekend. We may have gotten a little wetter than we were at the beginning of the week, but nothing substantial. There is a chance for some rain and some cooler temps on Tuesday or Wednesday of next week in Argentine, with most thinking it will then move into southern Brazil. Several forecasters are simply calling this a little break in the action, before these areas heat back up and turn dry once again. Production estimates continue to be cut right and left, and in my opinion, the market seems both concerned and somewhat confused. Have we added in enough premium to compensate for the production losses? Are we overreacting like we did during the US growing season and pricing in the worst possible scenario? Will the good areas in northern Brazil help offset the losses to south? These are all great questions, but ones we simply have no answers for at this juncture.
Looking ahead to the 2011 US ending crop totals, I have listed a few of the bigger questions that still remain unanswered to make it a little easier to assess the numbers:
- Will the USDA reduce the corn yield numbers? The USDA is currently estimating the corn yield at 146.7bpa, several in the industry think we should be sub 145bpa. From what I am hearing, Ohio and a few of the others who where late to harvest actually came in a little better than anticipated.
- Will the USDA reduce total harvested corn acres? The USDA is currently estimating 83.9 million harvested acres. Several analysts still believe we should be below 83 million.
- Will the USDA add to the feed usage numbers? The USDA is currently estimating corn feed usage at 4.6 billion. As you know, this number has been highly scrutinized and many feel it is way too low. Many analyst are looking for jump of 100 million in feed usage numbers.
- Will the USDA increase their export estimates now that South America is having significant problems? The USDA is currently estimating exports at 1.6 billion. There are now more rumblings that this number is too low and the USDA should push it higher by at least another 100 million.
- Will the USDA bump ethanol usage higher? This number could actually go either way. Currently the USDA is estimating 5 billion bushels of corn being used of ethanol. Most are estimating this number will remain unchanged, while others are looking for a slight bump higher, and a fraction of analyst are even thinking it could be lowered.
- Will the USDA lower their soybean export numbers? Currently the USDA is estimating soybean exports will total 1.3 billion. Many in the trade think the USDA is way too high and this number needs to be reduced by 100 million.
- Will the USDA raise the soybean carryout? The USDA is currently estimating the soybean carryout at 230 million. Many are thinking on weaker exports, this number could now jump beyond 300 million, maybe eventually north of 350.
Keep in mind there is a big difference between a "researcher" and a "risk manager." As producers, we are NOT trying to be researchers, we are not trying to predict crop size or weather patterns. As "risk managers" you should be accessing the data that is being presented and making the proper adjustments to your marketing plan based on numerous factors and assesments.
If you remember, our plan going into this marketing year was to get 30-40% locked in at profitable level prior to planting our crop. We were going to use the South American weather scares as our opportunity to lock in bushels. The opportunity is upon us and I urge you to react accordingly. Remember, you are NOT a "speculator" or a "research analyst," but rather a "risk manager." Reducing your risk and locking in profitable margins is your goal.
Many advisors or, should I say, "researchers" told many of you to lock in your bushels in 2010 at around $4.00 for the next three years, obviously that didn't work out so well and you are now left fighting an uphill battle. That is NOT "risk management," that is trying to predict the markets. That is being a researcher and calculating out your thoughts and numbers, then trying to predict the future. The problem is if you are right you are the "hero," but if you are wrong you have "zero." If your a producer you have to take yourself out of this mindset. Look at the entire picture, look at all of the pieces and all of the moving parts, then try and best assess your overall "risk," and ways you can effectively REDUCE it while still remaining profitable.
I believe we have more room to work higher on the production setbacks occurring in South America and the potential changes being made by the USDA, but as "risk managers" we have to take our shots when we get them. We also have to consider all of the pieces to the puzzle and make certain we are not wearing our "agricultural- only" blinders.
There is actually a very strong chance that in 2012 the US Dollar could rally and the problems in Europe could spill over and rain on everyone's parade. I am of the belief either of these two scenarios would be enough to alter money-flow and seriously dampen any type of weather related gains.
This keeps me cheering for the weather rally and hoping it will continue, but forces me to make more sales and reduce risk on fears that the "outside" markets could ultimately weigh on the entire commodity sector.
Be a "risk manager" and I promise you will succeed. Leave the speculation, research and data collecting to those who have something to prove. Remain patient, follow your game plan and look for all of the necessary clues.
As far as the "outside" markets are concerned, all eyes will be on US employment data the next couple of days. Next week I suspect most attention will shift back over to the European debt issues and 4th Quarter earnings here at home.