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June 2010 Archive for Current Marketing Thoughts

RSS By: Kevin Van Trump, AgWeb.com

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

Make Sure You Are Buckled In, These Markets Could Get Extremely Volatile!

Jun 30, 2010
Sorry for the long delay since my last comments...I have been traveling around with my son and his summer baseball team. I will certainly miss these summers together and the games under the lights when all of the kids finally move out and on to college.
 
As for the markets...what a wild ride today has been! For those of you who have started working with us in the past few months, your timing could not have been more impeccable. We have done extremely well and have been generating some terrific revenue in the grains and livestock markets. We have had numerous option strategies that have produced big returns in the past few months. 
 
Looking at today's big USDA report, you had to be surprised by the large reduction in corn acres. We certainly were surprised to see these numbers, but were by no means caught off guard as we had recently sold puts as part of a more complex re-ownership strategy that we had just put in place. Having watched the market break more than 35 cents in the previous sessions and demand levels staying strong, we estimated the downside exposure and risk at the time had to be somewhat limited for a short-term play. Our analysis paid off and we hit a big home run for our clients in today's trade. 
 
The question I am sure everyone is asking is, Where do we go from here? The report today certainly has the makings of being a complete game changer, but will we see the follow through to make it happen? 
 
Before you look at the facts, you have to recognize that the USDA in the past several years has almost always raised their acreage estimates for corn in this June 30th report. Not only did they NOT raise their estimates this time around, but they lowered their estimated total corn acres planted by almost 1 million acres. In addition, ending stocks came in at 4.310 billion bushels, which was almost 300 million bushels below many expectations.
 
The planted acreage number is big, but I think the ending stock number could ultimately prove to be of even more importance. With the stock number falling, you have to believe we are continuing to see better than expected demand for corn. 
 
You don't have to be a math whiz to figure out that if we start with less corn than we had anticipated and plant 1 million fewer acres than we had planned on planting, we should end up with a lot less corn. In the simplest of terms, that is exactly what traders are thinking and that is what ultimately shocked the market and caused the limit to move higher. 
 
From here, we have to start asking ourselves some tough questions and try to fill in a few of the blanks. Do we think the report is accurate in its drastic reduction? Will the USDA revise these numbers? Will they drastically raise yield estimates?  How does this all play out if we have a weather problem?
 
Let's assume the report is accurate and you reduce the number of planted acres by 1 million acres. Using the USDA's current average yield estimate of 163.5 bushels per acre, you have a reduction in their annual guess of 163,000,000 bushels. That is a significant amount of corn.  
 
We now have to determine what they will do with their current yield estimates. They currently have penciled in 163.5 bushels per acre. I believe they will certainly be forced to raise this number. If you figure last year we were at 164.7 bushels per acre -- and from what I am hearing, many areas have had some very optimal growing conditions up to this point -- it would surprise me not to see this number adjust higher. 
 
Just for argument's sake, let's assume they go nuts and raise the yield to a new all-time record of 166 bushels per acre. Given the recent reduction in total number of acres, we would still see our ending stocks slip to 1.365 billion bushels and be looking at a very tight stocks-to-usage ratio for the coming months. 
 
As you can see from the data, even if we revised the yield higher than 166 and went clear up to 168 bushels per acre, when you factor in the lower beginning stocks and the lower number of acres planted, we would be just a little over 1.5 billion bushels in our ending stocks...still tight. 
 
With all of this bullish data in place, you have to believe we are headed significantly higher. Proceed with caution!
 
I urge you to be only cautiously optimistic. I understand and know what the fundamental data is telling us, but I have also traded these markets professionally for 20 years and have learned to look a little deeper than the obvious. 
 
Longer-term, I certainly want to be bullish this market, but I am just not certain the lows are in place just yet. Without a major weather issue or some help from the outside markets, I could honestly see prices falling back and making new lows during the next couple of months. 
 
To begin with, I am not certain if the USDA's recent estimate and drastic reduction in acres will hold water and stand the test of time. It would not surprise me to see some type of revision to these numbers in the coming weeks. I also believe we will see some additional farmer selling and heavy pressure as we rally up on the board.  
 
You also cannot discount the recent global economic struggles and fears of slowing economic growth across the board. 
 
As the funds continue to manipulate and control the price action in these markets, you have to realize the stakes have been raised dramatically and we no longer trade off of simple supply and demand numbers.   
 
China allowing its currency to float freely on fear of U.S. and global debt continuing to mount with no light at the end of the tunnel will be of major concern in the coming months. Will China continue to buy U.S. debt paper? How will the U.S. dollar respond versus other major grain-importing currencies? If China slows dramatically, how will it affect crude oil? How will that ultimately affect ethanol production and consumption? How will the eurozone issue play out? Will the Gulf Oil leak start to drag on the economy? How will the recent jobless claims and latest wave of mortgage defaults play out?
 
The questions are certainly many, but you have to recognize their importance, as the biggest players in the grain and livestock markets are now glued to the outcomes. 
 
I am blessed to have been on the right side of the market this time around, but who knows what tomorrow may bring? I urge you to strongly consider all available data and, more importantly, the direction of the outside markets before you jump in with both feet. I am excited to see the bullish news, but I am going to proceed very cautiously until I see more confirmation in other key areas. 
 
SOYBEANS
 
As for beans, I continue to advise selling on the rallies. The USDA report showed ending stocks about 25 million bushels lower than traders were expecting. Planted acreage, on the other hand, was raised by just over 700,000 acres. With the planted acreage numbers being revised higher and the stocks being lowered slightly, the report had no real dramatic emphasis. 
 
I still believe that you have to be fearful of the ending stock outlook and just how many total beans we may end up with. If you take an average yield of 44 bushels per acre, I believe it pencils out to somewhere around 450 million bushels in ending stocks. If we leave yield at 42.9, the ending stocks still come in over 350 million bushels. That number is huge and would be the largest in the past few years, and a major increase from last year's levels. 
 
The weight of the ending stocks and the current worries on the global economic front leave very little hope for any sustained rallies.  
 
WHEAT
 
I desperately want to buy this market for the long-term haul, but unfortunately, as in the other markets, I think lower prices are ahead. You certainly have to like the long-term potential, but with thoughts that wheat will continue to lose acres to corn and beans in the coming years and the recent news that Canada has lost almost 10% of its recent wheat crop to severe weather problems, I just don't believe we have seen the bottom in prices just yet. The USDA report has only confirmed my thoughts, as the ending stock numbers came in about 30 million bushels higher than trade expectations, and the planted acres for spring and durum wheat were revised higher. Certainly wheat will follow corn and will be up big today, but it would not surprise me to see us make one more push lower as this market will attempt to put in new lows before we head to higher ground.  
 
In summary, I believe using a multitude of two- and three-way option strategies will be the play in the coming months and should help producers generate additional income and revenue as these markets hit heavy resistance up above. Look for this recent rally to be fairly short-lived across the board unless we get additional support from the outside markets or a significant weather scare in the coming days.
 
If you need any help or want more specific information regarding our current positions and/or strategies, please give us a call at (816) 322-9800. 

Eating Crow Can Be Tough...What Comes Next?

Jun 07, 2010
If you are like me, then you were hoping that we would see some follow-through buying interest coming from China this past week and the outside markets would settle down some and add support to the grain markets. Unfortunately, that scenario has not played out the way I had anticipated, and in actuality has done just the opposite. 

I have been humbled by these markets many times in the past and I am certain this time will not be the last. Fortunately, for those following our complete Ag Advisory Program, some great cash sales were made early in the marketing year and have helped ease some of the pain. 

Currently we are 50% sold in new crop corn at a cash price average of about $4.07, and 100% sold in the old crop. We also have 30% of our new crop hedged using various option strategies that we have been promoting the past few months. Certainly not as good as I would have hoped, but I am optimistic, as there is still a ton of time left.  

I know there are some services out there that have been advising their clients to get 100% of their 2010 sold, and even suggesting that they start selling or hedging their 2011. I personally believe that is a very bold move. Not to say that it's wrong, I just don't like the approach. Our market data and pricing strategies have proven time and time again that by using that type of approach you have to be extremely gifted at predicting market direction. I have found that without the help of a crystal ball, this can often be a daunting task and can oftentimes backfire, leaving you in a very precarious situation. 

One of our more simplistic pricing rules for corn is that we try and get the first 40% priced sometime between Dec. 1 and April 30 if we can lock in a decent gross profit margin.

From there we raise the stakes a little and go for higher margins on the next 30%. We like to price this second phase between May 1 and Aug. 31 (why we are currently only at about 50% sold), generally on weather problems, yield concerns, etc... During both the first and second phase, we also incorporate various hedging strategies to help protect up to 80% of estimated yields.

As we look to price our final 30%, our objectives can be easily adjusted to meet the farmer's individual needs and financial circumstances. Some are in dire need of cash and want to partake in a reownership program. This allows them to sell their grain, free up their cash and still participate in the markets in case of a rally. Others have plenty of on-farm storage and for the 10 months following Sept. 1 will make small incremental cash sales based on our selling signals. This also provides them with tons of upside potential. 

Yes, our program is certainly more intricate and complex than described above, but in a broad market sense it really is not. After years of market data analysis and market condition structuring, we have found that by using a formula of seasonal pricing strategies in association with simple hedging techniques, more times than not we come out way ahead. 

This is not to say that this might be the year I have to "eat some serious crow," and all of those who are 100% sold right now will be saying "I told you so..." The bottom line is I believe in having a systematic approach to pricing and hedging in order to produce the most optimal results. I have been in this business for many years and have found that predicting short-term market direction is very tough; predicting long-term market direction can be even tougher.  

My advice to those of you who wish you had more sold at this point is to be patient and develop a game plan for moving forward that adds protection but also provides you with some upside market potential. Put the plan down on paper, so you can take some of the emotion out of the game. 

I wish I was good enough to tell you to get 100% sold and could guarantee you that we are heading lower from here; unfortunately, I am just not that good. Sure, I would have loved to have gotten another 20% off the board and been 70% sold; it just didn't happen. Be cautiously optimistic in moving forward. 

We are a little further along in soybeans, with 65% priced and 15% hedged. Our hedges have really paid big dividends these past few trading sessions.

We continue to be patient in the wheat market and have been waiting to price our final 20% for several weeks now. With hindsight, it looks like we made some great sales early on in the marketing year. Currently our cash average is in the $5.40-$5.45 range. We recently took some nice profits and decided to lift our short hedge positions in this market. Unfortunately, this leaves us unhedged on our final 20%.

Market Updates: 

Corn: The outside markets and the thoughts regarding a record crop have really hurt these past few days. With little or no news circulating about China, the bears have gained a real grip on this market. Many traders will be watching the weather forecasts, as some much needed price support could come from hot temperatures hitting the heart of the Midwest by this weekend. If the heat looks like it will continue, we may see some people start trimming their yield estimates.  

Soybeans: The outside markets and rumors that China is cancelling shipments have been all we needed to shake this market. Right now one of the few price supportive articles I have read showed that Argentina and China have shown no progress in their efforts to resolve the trade issues on soybean oil. I have even seen now where China is preparing to hold off on all Argentine imports for the rest of the year and may also avoid Argentine soybeans. Many believe if this Argentina/China thing doesn't get resolved, it could be a huge boost to U.S. prices. 

Kevin Van Trump
(816) 322-980
kvt@aghedge.com
Please let me know if there is anything we can do to help you out. 
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