TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.
It is pretty common for one extreme in market prices to be followed within a year or two by the opposite extreme. After record high prices in Corn and Soybeans this year it seems very possible that at some point in the next two years markets could go to the other extreme. Due to inflation I do not think record lows are possible, however prices could go substantially lower then what the market is currently thinking. If this scenario does play out it will become a case of those who have and those who have not. With this in mind I want to touch on producers strategy for growth over the next few years.
Corn and soybean prices reacted with record highs this year after a sub-par growing season last year followed by a devastating drought this year. Coming into the growing season this year we had thoughts of big ending stocks based on record planted acreage for corn and big South American soybean crops. As it turned out good crops were put under tremendous stress and prices reacted accordingly. With ideas of shrinking ending stocks and some analysts even fearing negative carry overs, corn and soybean prices moved into price rationing mode. When markets price ration they aim to do two things - curtail demand to spread out the smaller supply and, encourage more production of the commodity that is scarce. In the case of corn and soybeans the USDA has certainly indicated that demand has fallen sharply at current price levels, and thoughts for next years planted acreage suggest records for both corn and soybeans not to mention that South America is already planting record acreage with what looks to be a very beneficial El Nino weather pattern.
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In this current global economic climate it is easy to destroy demand and difficult to create it. Consumers or end users will do their job and look for viable substitutes to replace higher priced options in order to survive. Pressure needs to be exerted to make a change, and in the case of corn and soybeans pressure was exerted in the form of high prices this year. To get consumers to make the switch back pressure may need to be exerted in the opposite direction with low prices in effort to "buy" demand back.
So, the concern for producers must be that if we do go through a growing season with even mediocre or average success on what is now lower demand then ending stocks could grow to historically large levels. If this comes to fruition then markets will seek to correct the oversupply much in the way price rationing seeks to correct a shortage, only with the opposite effect on prices.
The question every grain producer has to ask themselves while we still have high grain prices is - What are my plans for the future? As I see it, there is a good chance that this year of record high prices breeds a situation that will put many producers under tremendous pressure. However, this scenario also opens the door for tremendous opportunities as well.
In my mind we are moving toward a crossroads for those who have and those who have not. By that I mean those who have prepared for the future and taken advantage current opportunities, and those who have not prepared and simply reap the profits of selling high prices for whatever they were able to produce for this year only. There are things that need to be done in times of high prices, such as this, if one wants to survive and prosper. Most of those things require foresight and planning. This may not be the time to go out and bid on record high priced farm land. This may not be the time to buy all new equipment if it means maxing out your credit line. This certainly may be the time to reinvest profits into your operation especially if it is putting you in a better position to grow in the future and covers future operational costs.
At this very moment in time, one of the key components is a well thought out hedge strategy going 2-3 years into the future. Strike while the iron is hot as they say. Lock in profit margins while they are good as I say.
With rising input costs and higher and higher land values, grain producers break even point has continued to rise. And, the market is always conscious of this. In times of shortage the gracious market moves to reward producers and encourage them. In times of glut the vengeful market moves to push prices below breakeven and push weak producers out of business to cut supply. The trick is, and the reason futures markets were established is to allow savvy producers to lay off the risk of a vengeful market and take advantage of gracious ones. The point is that one of the biggest determinators of who will be a have and who will be a have not when grain prices swing back to lows is the ability to employ a proper hedge strategy and lock in profits while they are available. Especially for those looking to expand and grow their operation in the next few years because, lets face it, it is a world of survival of the fittest and just as some will suffer from low prices others will find opportunity.
Opportunities will arise for those who have locked in profit margins when those who haven't will struggle to break even. Those who struggle to breakeven will need to abandon thought of growth and in many cases may also be forced to cut their current operations while those who have locked in profit margins will have the ability to reinvest into the business. Amongst other things, land may be a key part of what struggling producers will need to part ways with. Weather it comes in the form of selling land to free up funds or giving up rented land to reduce input costs, one way or another thoughts of growth will fade to hopes of survival for some. Furthermore, if this is happening on a wide enough scale, the advance in land prices could retreat providing fantastic opportunity for those who can manage the investment. This is growth strategy realized for those who have prepared.
For those looking to expand their operations in the next few years it is an absolute necessity to have a hedge strategy in place that goes out 2-3 years. It is necessary to lock in profit margins while they are favorable. Hedge strategies are an essential piece of the growth puzzle.
One concern of using a hedge strategy that goes out 2-3 years is cost and margin, another is opportunity cost. Both of these issues can be addressed using option strategies. For example, Window strategies can keep cost and margin requirements down while allowing for some upside potential. Here at Zaner we work individually with our clients to develop and customize hedge strategies based on their specific needs. Markets can be ruthless and function with no heart, discrimination or mercy. We would like to help you make sure you have a plan in place to make sure you don't end up a have not.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
With high volatility in a market, option strategies may be a good tool for hedgers and specs alike.
December Corn Daily chart:
November Soybeans Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have new crop corn above $7.00 and new crop soybeans above $15.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent.
Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs.
Ted Seifried (312) 277-0113 or email@example.com
Please check out my Blog at: http://tedseifriedfutures.com/
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=Seifried
Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION