Corn and the implication of the USDA Supply and Demand report!
Apr 09, 2009
Today’s report had a surprise for me when the USDA increased feed usage by 50 million when hog herds have been reduced, poultry starts and feedlots are blood red. Go figure, maybe we will see 450-lb. hogs again, but the real answer is USDA overestimated last year’s crop and they need to make the numbers balance out.
There were no other great demand surprises in the report. The implication for me is it’s now all about weather. How fast do we get the spring crops in and will producers adjust their corn bean planting mix?
Implication: One should expect a rather high degree of market anxiety to remain until we get into pollination on the marketing plan. This means a basic defensive selling posture should be maintained until we get into the last of June to early July.
Here is an outline of my game plan for my producers that I help manage bushels over.
1. I intend to focus on liquidating all short puts sold to insulate the long puts or short futures by the first two weeks of May or if the put premiums get below 15% of the level they were actually sold at.
2. In regards to anyone who sold puts, look to stay within 20 cents of the market. While this could imply several roll ups, I really don’t believe we have much more than one more solid rollup. Right now most clients should be in the $4.20 STRIKE PRICE. My intent will be to roll up some place around the $4.45 to $4.52 on an overbought situation. My preference is to take advantage of the last of April to first of May price bounce.
3. In regards to selling calls to help finance the purchase of the long puts I’ve not been really excited about this strategy because of the seasonal risk of increasing implied volatility as we move into the April to June time period. My suggestion is we should wait at least to the first of June and preferably mid-June before we start scale up selling the December 2009 $6 or higher calls to help pay for long puts.
4. We alert all clients to not fall asleep on selling of the December 2010 corn in (short futures) the next few months. We have a little interest at $4.50 but would get very motivated to be a scale up seller from $4.70 to $5.05 level. Again the time period is the first of May and the last of June.
SUMMARY: We suggest there is going to be two highs, the pre-planting spring high and the pollination high. Our bias is to sell the first via a long put strategy and hope for higher price action. The alternative strategy is to wait for the summer high where your 100% right or wrong. If the market does not rally your fall back plan would be to store and hope for a rebound rally. We would not be surprised to see a 75 to $1.25 break from the spring/summer high to the fall low.
If we can help you with your 2009 or 2010 hedging program [using cash and futures], please give us a call at 1-800-832-1488 or email me at email@example.com or firstname.lastname@example.org.
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