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Hedging Corn and Soybeans

RSS By: Howard Tyllas, AgWeb.com

Howard Tyllas is currently a member of the Chicago Board of Trade and registered with the Commodity Futures Trading Commission as a floor broker and as a Commodity Trading Advisor.

Hedging March 2013 Corn and Trade Ideas for 2/12/13

Feb 13, 2013

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This report was sent to subscribers on 2/11/13 3:00 p.m. Chicago time to be used for trading on 2/12/13.

March 2013

After the close recap on 2/12/13: My pivot acted as resistance and was 7.03 1/4 the EXACT actual high, and my support was 6.92 3/4, .01 1/4 from the actual low.

All charts and numbers for 2/13/13 have already been sent to subscribers at 4:30 pm.

March 2013 Corn

7.22 ¾ FG
7.19 ½
7.13 ¾ near Downtrend Line
-----------7.03 ¼ Pivot near the 200 DMA
6.92 ¾
6.86 ¼
6.78 XX
5 day chart.... Down from last week same day
Daily chart ... Down
Weekly chart ... Sideways
Monthly chart .... Sideways 7.05 is the 200 DMA
ATR 11 ½ Ex. Oversold 2%

Daily numbers support, gap at $7.22 3/4 and the downtrend lines at $7.16 are resistances.

The 200 DMA is pivotal not only for the day, but the direction for long term trades too.

In my daily March corn numbers on Monday my pivot acted as resistance and was .02 ¼ from the actual high; my support was .02 ½ from the actual low.

For 2/12/13:

Grains: I am sure it is comforting to unhedged producers to listen to the services telling you all the reasons why corn should not be going down. Bulls thinking that betting on US crops will remain dry, and get another unfavorable year one way or the other, is not working the way they had thought. I laugh when I see someone bet more than a "what if" or "long shot bet" which is a very small amount, and cry when I think about a farmer who is betting his "paycheck" on it. Yes, they are betting whatever is unhedged. My producers hedge already reflects what part of the upside they want unhedged, and what protection they feel is needed, and with that foundation they only risk a "part of their income" not all of it. When using options the way they are, everything slows down which allows less emotion and much more control.

Bottom Line: The fundamentalists are making "wagers" based on fundamentals as seen through THEIR eyes, I make bets based on the charts that not only I, but everyone can see. I know when I am wrong, it's because the chart level or daily number did not hold and I am more than willing to take a loss and get stopped out even if I get stopped on the high or low of the day, no problem! But when do they know they are wrong? How much do they risk before that idea is no longer valid? Nothing really changed fundamentally since the January Final report, but corn and soybeans rallied to their resistances that were clearly drawn well in advance, and the last 5 days spit it out and more. How much higher where they willing to sell, and how much are they losing in that pursuit? Nothing changed except their wallet. So when do they get out? Oh, they tell you if the market goes below "here" on the chart, then sell because their idea is no longer valid. Does that make sense, the fundamentals are still valid but they use a chart to "throw in the towel", sounds like they are trading a chart, NOT the fundamentals. They think the chart should do what they perceive the fundamentals equate in price, and I think the chart (which is a record keeper of the market) will do whatever it wants REGARDLESS of the fundamentals. Ask a floor trader if he is trading fundamentals or price on ANY given day. No matter how they get price levels they want to buy or sell, it is technically driven, not reading fundamentals to everyone standing in the pit. I am a floor trader (even trading on a screen, even position trading, I have the same mentality and approach), and charts are the only thing I rely on to get my numbers, get objectives, and where to place my stops.

Today's 2013 US corn yield forecast of 163.5 BPA, and soybeans at 44.4 BPA compare with 2/12 Forum yield forecasts of 164 BPA/43.6 BPA respectively. Planted area forecasts of 96 million acres (MA) of corn, and 76 MA of soybeans which are well under trade estimates of 97.8-99 MA for corn and 78.5-79.5 MA for soybeans. Of course these are guesstimates, but are based on recent and past historical data. It is the "ballpark" we are playing in.

There are many parameters in the baseline projections here in the US and worldwide, but I am not concerned with that at this time. What I do make note of is that the USDA projects prices for major crops are declining, but should be supported well below our current levels. To me this means there is no support in sight.

USDA said their 2013 US corn yield forecast of 164 BPA is a 25 year trend including 1988 and 2012 droughts. Their yield forecast assumes that 80% of corn is planted by mid May, that June is not extremely dry and that average weather occurs during July. USDA also said US corn yields over next decade will advance 1.9 BPA per year to 181 BPA. End of marketing year corn stocks peak 9/2015 at 2.32 billion bushels making farm corn prices slide back down to $4.10. On farm corn prices over next decade range from $4.30 to $5.40 with 2013/14 corn price representing high water mark at $5.40.

USDA sees tight US soy stocks over the next decade with carryover stocks ranging from 185 million bushels (MB) on 9/2014 to 226 MB on 9/2023. US soybean acres over the 10 years remain pretty much unchanged while the US soybean yield advances 2 BPA over the next decade or 0.2 BPA per year. On farm soybean prices ($14.30 for 12/13) decline $3 in 2013/14 and then range from $10.35-$11.35 over the next decade.

I had a couple of producers look at and we priced 2014 corn, you can use the same strategy for 2014 as now, but you must be able to margin it as well as the current old and new crop. I have no problem doing just that. If you wait for weather to carry the prices higher than they are now, hedge this summer when you get the rally, but remember, like December 2013 corn, its high in 2012 was only $6.65 while the old crop got to $8.49. As a trader (or any businessperson) all that matters is profits/income and the ability to lock it in before production gets started. It does not matter if the price will be higher or lower when the production is finished, they are not gamblers, they are manufactures who locks in profits and then do the work. Yes, they can make more or less profits depending on if expenses go up or down, or productivity, but the "meat and potatoes" of their income is locked in by their "sale or hedge". The above parameters the USDA is giving us, is what the pendulum will use as it swings with force sharply higher with crop problems, and sharply lower as a reward to an above average trend yield year.

2013 crops have a lot of ground to cover between now and the summer, and it could grind higher and lower with weather perceptions. I would take any rally as an opportunity to add protection below what we currently have. New subscribers who are unhedged producers should ... Subscribe Now! You can adjust the strikes to reflect YOUR thoughts and ideas of how much hedge protection you want, and what kind of upside you want too. Your margin is "known" no matter how high the market rallies, and you know where your protection begins and ends.

March corn has closed lower 7 days in a row, and after the first 2 days of buying December corn to sell the March corn, it has come down 5 days in a row. I talked about this prior to it happening, and that is why I said December looked strong. The sellers in December corn drew the line in the sand at $5.95, and with March going down the sellers there were embolden. "Things do what they do until they do not do it anymore" and so grains will continue lower until they do not. After the string of lower closes, the market is vulnerable to a short covering rally, but with the baseline news out, it will grind higher at best. Volatility is getting hit, meaning they are paying less for the right to be long or short. I am concerned that we will not rally from here, and that protection could run out before the March options expire in a week from this Friday. It looks like to me we will be here or lower on options expiration, which means great profits were made in the last 3 months, and we will get the chance to be long the May options at lower levels to protect and rally from. Every year we have seen these opportunities in 1 or more of the option rolls. Producers have made windfall profits after learning how to participate in the market, sell calls when in the bin, roll up and down puts, and the best part is that THEY are in control! They took the "trader" in me to help the "producer" in them. Any rally at a resistance level should be sold! I continue to prefer to sell rallies instead of buying breaks, but have no trouble buying to cover "shorts". I never lost money taking a profit. Same ideas goes for the December contract too.

The trouble for this last rally was the "funds" and speculators who "pressed" their bets at strong resistance levels for both corn and soybeans, increasing their bets with huge increases shown in the CFTC COT report. I have said I like them because they really know how to swing the pendulum, and that presents opportunities to those who know how to wait for them.

Soybeans and corn need a day or two to hold, and when that happens the chart will have current lows to work with as new lows for the "run", or showing support for older chart supports. I realize the markets are extremely oversold now, but they are still vulnerable to further long liquidation, as well as "scared" farmer selling. They should be scared if unhedged, and above $5.50 December corn should work well for most. Waiting and betting on prices to increase should not be the role of a farmer, securing some income through a hedge and betting some of that income on the "what if" is a more logical common sense approach.

I want to trade the numbers without bias today and risk $.04 in corn and $.06 in soybeans using a stop to protect any idea.

2/11/13:

Grains: Look at the report and see inventories were a little bearish for corn, and friendly for soybeans com-pared to expectations. World inventories were bearish, SA production was bearish.

U.S. Inventories Before 2013 Harvests
Analysts' Estimate Prior USDA
USDA Feb. 8 Average Range 2013 2012
Corn 632 616 502-697 602 988
Soybeans 125 130 103-140 135 169
Wheat 691 717 512-783 716 743
2012-2013 World Crop Reserves Before Northern Hemisphere Harvests
Analysts' Estimate Prior USDA
USDA Feb. 8 Average Range 2013 2012
Corn 118.04 115.57 114.0-117.0 115.99 131.79
Soybeans 60.12 59.07 58.0-60.3 59.46 55.1
Wheat 176.73 177.01 174.0-180.0 176.64 195.78
2012-13 South American Crop Production
Analysts' Estimate Prior USDA
USDA Feb. 8 Average Range 2013 201
Argentina
Corn 27.0 26.4 24.0-28.0 28.0 21.0
Soybeans 53.0 52.9 50.5-55.7 54.0 41.0
Brazil
Corn 72.5 71.3 69.8-73.5 71.0 73.0
Soybeans 83.5 82.7 81.0-84.0 82.5 66.5

Bottom line: the report did not justify further advance above the soybean resistance levels, and with the sharp drop in price means the market had already "baked" in too much bullish sentiment. Corn on the other hand on Thursday had already settled $.35 off the high last week and $.33 off the 2013 low made in January, so since the report was a little bearish, the market settled slightly lower. Heavy volume and 100,000 corn spreads were traded on Friday, so whatever anyone thinks about the report, I think it has already been factored into the closing prices. My comments going into the report said "With that being said, you have the same odds as I do to predict if the gap at $15.03 3/4 in March soybeans will hold the market from going higher, or if the gap at $7.08 3/4 will hold March corn from going lower. You know that I do not "cheerlead" the market through support or resistances, so I look at them as holding until they do not".

My producers have seen this movie now many times per year, and are learning more and more through real time hedges and observation. I am sure all my producers did not have stress going into this report except for knowing the need to buy more 2013 protection if the market breaks down. If they have stress, then what do you call unhedged producers who do not have $.48 in their pocket like we do, and have the same risk as we do now where our protection ran out. I know you have a plan to control risk, make sure you EXECUTE YOUR PLAN!

Corn took 4 weeks to rally, and 4 days to give it all back. This is typical for many a grain rally in the last 37 years I have witnessed, and one reason any grain floor trader prefers the "sell side" when possible. It's like the "Roach Motel" they "check in" one at a time easily, but they "cannot checkout", and when they try they find it difficult because they "all want to get out at once".

My service is focused into protecting hedges because the charts are breaking down in the 2013 contracts. November soybeans are approaching the uptrend line and should find support, otherwise the lows in August, November, and January is a short term "triple bottom" at $12.55 1/4 and will be strong support. In June 2012 it got down to $11.40. November soybeans have the same resistances levels as before, with $13.20, $13.40, and the bracket line near $13.60.

December corn stopped $.00 1/4 from my support number but the chart is clearly breaking down. Gap at $5.47 1/2 should be solid support in the near term, $5.10 in the summer, $4.50 or lower by harvest even with a below average yield of 151 BPA (USDA will probably look for 156 to 162 BPA, in 2 weeks they will tell us via the USDA Forum). $5.95 has proved to be solid resistance in the short term, with 2 more key re-sistances within $.14 to $6.08 3/4 keeping the bears in command.

Here are some strategy tools you can use to help reflect your ideas and the risk you want to take, or not take. Since we have the December $... Subscribe now!

These are "real time" examples of how I use options, and now you can use the result of my decades of trading with the examples given if I had to "hedge" my crop (or if long a futures contract because I thought the market is going higher). I would improve my position whenever possible, and get more protection when I needed to control my risk on my ideas. You can perfectly reflect what you think, and clearly know the cost, full margin, risks, and possible rewards.

As time goes on, in the money options gain more in value, and out of the money option go down in value, if the market is unchanged every day. Even if you do nothing, you should follow the strikes you have on now in a journal, and through observations I learned more than from any book.

I want to trade the numbers without bias today and risk $.04 in corn and $.06 in soybeans using a stop to protect any idea.

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Disclaimer: No guarantee of any kind is implied or possible where projections of future conditions are tempted. Futures trading involve risk.In no event should the content of this be construed as an express or implied romise, guarantee or implication by or from Howard Tyllas, that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future performance.

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