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%.
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
Please let me know if there is anything we can do to help you out.