Advisers suggest options to reduce risk and maximize reward
Commodity advisers could not be more different in their predictions for 2012 crop prices. Their outlooks for the coming year range from extremely bearish to almost off-the-charts bullish.
1 = Bearish
6 = Bullish
When it comes to the strategies producers should employ to protect themselves against the whims of the markets, opinions also vary. What analysts do agree on, however, is that producers should use put and call options—in addition to other marketing tools—to protect against downside risk and be flexible enough to capture any upside price potential.
As you prepare your 2012 marketing plan, use the following tips from 14 analysts to help you stay on top of what promises to be another year of volatility.
Brian Basting, Advance Trading
Ratings: Corn = 2, Beans = 4
Next year’s surprise event probably has something to do with the economy, either ours or a foreign one.
The best marketing strategy for the year ahead is to use options to manage risk.
If a producer maintains ownership of crops in storage, the risk is lower prices. The use of put options not only provides downside price protection, but also provides unlimited upside potential. This is also an effective strategy for 2012 corn, soybeans and wheat. Prices for new-crop 2012 are still at attractive levels despite the recent price sell-off.
Another way to manage price if a sale has already been made is to purchase call options, which allow a producer to participate in a market rally. Options perform exceptionally well in a volatile price environment, which has been the norm for the past several years.
Jeff Beal, The Gulke Group
Ratings: Corn = 4, Beans = 3
The recent drop in prices gave new life to ethanol, livestock and exports. However, given USDA’s predicted ending stocks, odds are high that we won’t run out of grain. We proved this past summer that we can deal with tight stocks. With plentiful corn and wheat stocks on a global basis, the short-term potential for soybeans—especially with La Niña re-emerging just in time for South American planting—is probably more bullish than for feed grains.
Exports are the big variable. With an 866 million bushel projected carryout, a 150 million to 200 million bushel increase in exports would use 17% to 23% of our leftover supplies.
For years, USDA and private analysts have been predicting that China will come to the U.S. trough for more grains—and they might finally be right. The other event that could blindside us is the acreage mix. The recent shift in corn and soybean profitability suggests additional corn acres might be harder to come by.
Hedging strictly with futures can be expensive and emotionally draining for the inexperienced or undercapitalized futures hedger. The same can be said for just buying puts and rolling them up in price rallies.
Bill Biedermann, Allendale
Ratings: Corn = 2, Beans = 3
I’m bearish on corn due to current prices and the fact that ending stocks above 800 million bushels is not a shortage by any means. Preliminary estimates suggest that ending stocks in 2012 will exceed 1 billion bushels.
On soybeans, I’m neutral. Although U.S. carryout is tight and bullish, world ending stocks are at a record. Thus, the market could become emotional as prices seek a level that reflects where supplies are geographically moving. We have seen restrictions on South American soybeans during the past two years. Politically, this appears to be changing.
There are potential surprises ahead, however. Traders are assuming that inflation-based fiscal policy will drive the economies and stabilize bank collateral and capital requirements. If inflation does not meet or exceed the targets mandated by central banks, then ag markets (which have already priced in inflation) will be vulnerable to a decline in prices.
Due to initial projections for rising stocks, protection is more important this year than in the past three years. Given the volatility of macro markets and weather, I would buy a call to cover at least 50% of every bushel sold, so that the upside is still open if a rally appears. If markets decline to our preliminary objectives, the sale will protect your operation from fiscal disaster. However, the call will allow for strong revenue participation in a rally.
Richard Brock, Brock Associates
Ratings: Corn = 2, Beans = 3
The next unexpected event could be a slowdown in China that will add to a worldwide recession. Demand for grains will soften, and, if we go back to trend-line yields at the same time, the severity of a major bear market will have been underestimated by many.
What worked in 2010 hasn’t necessarily worked this year. Corn and soybeans peaked in September, and those highs will not likely be challenged. We advised our subscribers to go to 80% sold on this year’s crop at that time. We also went to 40% on 2012 corn and 50% on soybeans.
There should be modest price gains from now into March 2012. We don’t want to have any unpriced old-crop after that point and should be as heavily sold as is comfortable on new crop. This is a major bear market.
Alan Brugler, Brugler Marketing
Ratings: Corn = 4, Beans = 5
Corn ending stocks are still snug going into 2012. Livestock feeding margins turned positive in October, ensuring that corn will be fed for the time being. Prices will likely be held back a bit by large world wheat supplies and potentially by record large corn acres in 2012 unless soybeans bid them away.
Wheat feeding is definitely taking market share at the expense of corn, but the world will not permit wheat to be fed if it might be needed for human use. Both global and U.S. soybean stocks-to-use are tight, with rising world demand and the push to increase acreage for corn. The events I fear the most are tied to the expiration of the bio-fuel credits at the end of 2011.
Try to control margin exposure. The use of options spreads and their cash market equivalents (or hybrid futures/options positions) are probably the sanest way to ride out market volatility while protecting margins and capturing upside opportunities.
Mike Florez, Florez Trading
Ratings: Corn = 6, Beans = 6
I look for 2012 to be just like this year, version 2.0. We will flip the calendar to January with bare-bones corn and soybean stocks and there will be pressure to produce big crops to replenish the reserves. This might be difficult to achieve, though. I expect demand to remain stout because current prices will not ration supply.
With that in mind, I expect prices to challenge the highs in 2012. In fact, based on technical analysis, if corn goes higher than $8 again, it points to a move to $13. Be patient; I would not be aggressive in selling cash grain right now.
If you do have price issues, it will probably come from a situation that is not directly from the ag sector.
Mark Gold, Top Third Ag Marketing
Ratings: Corn = 2, Beans = 3
The 2011 corn yield has yet to be established. However, domestic demand has fallen with higher prices and wheat feed usage is taking some of the edge out of the market. Corn looks poised for a post-harvest rally from Chinese demand, but huge world carryouts should keep rallies in check. In addition, foreign financial backing for hedge/commodity funds might be dwindling. I would rate this crop bearish enough to justify the expense of purchasing put options to protect downside risk.
The 2011 soybean market is facing tight carryouts, which should justify a postharvest rally. However, a large South American crop will keep rallies in check.
I would expect soybean prices to hold value relative to corn prices, as the corn/soybean ratio should entice more soybean demand at the expense of corn. Sustaining soybean rallies and any expectation for prices more than $13 will depend on continued Chinese demand and the weather in South America. Finish 2011 cash sales as prices approach $13 and re-own call options if the nearby soybean contract closes higher than $13.
Recent U.S. trade policies have already upset the Chinese. Should they decide to retaliate, it could have serious ramifications for U.S. grain markets.
The best strategy for 2011 crops is to get them sold and don’t mess with storing. Look for opportunities to replace those sales with call options. Protect 2012 crops with put options and crop revenue insurance until cash sales are made.
Brian Grete, Pro Farmer
Ratings: Corn = 5, Beans = 5
We maintain a bullish long-term price outlook for corn and soybeans. The recent price break is encouraging more end-user buying when usage needs to slow down. The rationing process still needs to play out through higher prices. That’s primarily why we are bullish.
The financial situation in Europe is the biggest threat to not only corn and soybeans, but the entire investment world. With the European situation now common knowledge, euro-zone economic problems should not sneak up on anyone. The biggest surprise in 2012 could come from policy. Washington is in an extreme budget-cutting mode at a time when a new farm bill needs to be written.
It’s imperative to take advantage of strong price rallies and resist the urge to get more bullish as
prices rise. Corn has twice run out of buying interest on futures moves above $7.50, and soybeans have repeatedly seen buying interest dry up above $14. Moves to, or above, those prices should be viewed as selling opportunities, with the realization that futures won’t likely spend much time there.
Gregg Hunt, Archer Financial Services
Ratings: Corn = 5, Beans = 5
USDA left corn yields unchanged in the October Crop Production report, which gives room to take yields down by 1 bu. in future reports. On the usage side, USDA has underestimated corn exports by 100 million bushels and feed use by a like amount. We could see ending carryout in the 500 million to 600 million bushel range without any problems in South American weather.
For soybeans, China, with slower world growth, will build stocks and try to keep its food inflation from rising above the current 13.5%. The biggest concern for the Chinese leadership is to keep things stable.
I have been on record all summer to sell $7 corn and $14 beans, and we could see these prices again on a South American weather scare.
Justin Kelly, EHedger
Ratings: Corn = 3, Beans = 4
Global wheat supplies are approaching record levels. This will cap corn and wheat prices unless a major weather problem develops globally. Global supplies of corn, soybeans and wheat are increasing at a time when there is a possible global slowdown and a short-term bubble in commodities.
Good crops in South America combined with a slowdown in Chinese buying could cause a massive break in prices.
With the U.S. government under pressure to cut expenses, I give more than a 50% chance that we will see farm subsidy cuts. Without these subsidies, crop values could deteriorate. This could push prices back to 2009 levels of $3 corn and $7 soybeans.
Mike North, First Capitol Ag
Ratings: Corn = 2.5, Beans = 4
The problematic Greek debt is still possible. If the country defaults, this will be just the beginning, as banks will have to write down not only Greek debt, but other foreign debt as well.
The domestic effect of such an event will be, first, to heighten the value of our dollar relative to that of the euro. Second, it will draw us into a conversation about our own debt holdings and create further concern in regard to U.S. debt.
Early on, having sales made on at least 25% will allow producers to manage current levels and secure profits. The balance of the crop should be protected with a put option strategy that allows protection from downside price decay while allowing the volatility of the market to provide upside opportunity.
If you are an aggressive seller, put together a call strategy to allow participation in the coming volatility. No one can predict price movement. However, you can position yourself so volatility is your friend and not your enemy.
Scott Stewart, Stewart-Peterson
Ratings: Corn = 4.25, Beans = 4
The demand outlook remains strong, which is why we are bullish. This is backed up by strong and improving basis for both corn and soybeans. Even if we have occasional downtrends, we expect that high prices will return and dominate. For sure, volatility will be present. The only way to eliminate volatile markets is to have surplus supplies and depressed prices. That does not appear likely in the foreseeable future.
Strength in the dollar could have big impact, however, and put the brakes on prices. A 16% change in the dollar translates to a $1 change in the price of corn for global customers. Another potential negative might be major instability in China.
There is so much variation in corn and soybean yields that we will not really have any clear idea until the January USDA Grain Stocks report.
Bob Utterback, Utterback Marketing Services
Ratings: Corn = 4.5, Beans = 3.5
I see three potential events that could be real game changers in 2012: The biggest is a major global slowdown catching fire and burning into a full- fledged deflationary contraction. Second is political reaction to the fear of severe deflation of monetary and fiscal stimulation. Third is a yield reduction event. The potential is building for El Niño and possibly solar flare activity that some say could be even worse than this year.
If we combine another year of poor yields with a global economic slowdown, it is possible we’ll experience violent, volatile markets. I see at least two marketing routes in 2012: When the market achieves the desired target selling price in December 2012 corn and November 2012 soybeans, buy in-the-money puts. Hold the put until late fall, when production is known, and then roll into a forward cash contract to capture the carry and wait on basis narrowing. If the market does rally after the puts are bought, have a predetermined plan for rolling up puts when a specific amount of price appreciation has occurred.
The most aggressive, but possibly most profitable, marketing strategy is to have selective trade futures with a predetermined process once the minimum profit level has been achieved. Essentially, when the trend is up, be out of the futures market; when the trend turns negative, be short. This decision should be based on technicals. The big problem with this strategy is that the limit down moves following a report can force a producer to sell on negative price action.
Doug Werling, Bower Trading
Ratings: Corn = 4, Beans = 5
Recent purchases of U.S. corn by the Chinese tells us that when prices get low enough, they will buy. China’s need for feed grains is so great that even though it has a record corn crop coming, it is still buying U.S. corn.
U.S. soybeans have had a large price decline, and China has been in the market for soybeans, too. The yield and carryout reductions in the Oct. 12 Crop Production report give the soybean market legs. The higher mark on the bullish indicator comes off speculative weather for the Brazil and Argentina growing season, a key factor going forward.
Europe continues to be a huge risk to all markets. A lower euro and higher dollar means lower grain prices. Whatever you don’t have sold, put it in your bin and play the basis.
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- Mid-November 2011