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April 2010 Archive for Current Marketing Thoughts

RSS By: Kevin Van Trump,

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

How to Play the Cattle Market

Apr 21, 2010
I realize we have had one heck of a move higher, I’m just not convinced that it has topped out just yet;  Sure, I think it will happen eventually happen, but when?
The Packers seem to have really good margins right now, I am hearing that cattle prices at $99, or even $100, will pencil for these guys right now.  Feeders are  also helping by pulling cattle forward to try and catch the high cash market before it fads away.

Last week’s fed cattle slaughter was just above 500,000, it was a nice jump higher from the previous week, and from what I am hearing we are going to continue higher  through Memorial Day topping out between 550,000 and 570,000.  You have to think this much added production will eventually force prices lower.  

With the thought of lower beef and cash cattle prices I believe coming our direction, and the increase in spring placements,  I am just itching to get short the August futures. I am just still a little apprehensive. No one seems to have a real handle on the export numbers, I am not so sure we won't see a significant pick-up as their economies continue to improve.  If we see heavy demand continue in exports for chuck, round, and trimmings prices then we can forget seeing cutout values and cattle prices dropping anytime soon.  The other big thing that is making me a little nervous is that we don't seem overvalued at all right here. Buying still seems strong, everyone is comfortable and still able to turn good margins.

I know for sure we are going to see a drop off in demand once we get out into June and July, I am just not sure how much it will effect our overall prices though. Some of the big traders are talking as if the cash market might stay above $90 for a long time. In fact many of big boys are thinking that this might be when the cattle market re-defines it's boundaries preparing for the increasing global demand that is heading our certainly can not rule it out

Do I believe we are going to see lower prices? Yes
Would I exit my long positions and take profits? Yes
Would I hedge some more cattle at these price levels? Yes 
How far do I think prices will break and when? Unfortunately that is the magic question.

Right now there just doesn't seem to be a lot of room left to the upside, and I am not sure there will be a major break lower when prices do start to fall. 

With the volatility and price action high like this, you may want to consider selling out of the money calls and out of the money puts.  This gives us a way to capture nice returns when the market looks to be trapped at the high end of a trading range. 

If you need any more information please don't hesitate to call or e-mail.

Kevin Van Trump

I know you want to be optimistic, but consider the facts...

Apr 19, 2010
CORN: Just to recap, corn rallied big last week due to very strong export sales, the funds starting to get back in the market, and very little selling from the farmer side of the business. The big thing holding it back is the ideal planting conditions we have seen here in the US. Globally corn is back on the move, in fact the Chinese corn market is back to over $6 per bushel, and there is continued talk that China might be importing corn into it’s southern regions.  With heavy demand and continued buying from the funds I wouldn’t be surprised to see July futures eventually rally and get to $4. If we reach that level I think we will see a flood of heavy farm selling, and we will continue to slide lower as the market prepares itself for another record size crop.  I like the thought of selling the rallies.  *Selling some out of the money higher up calls might be an idea. 
SOYBEANS: With continued strong demand for old crop beans and the carryout down around 190-210 million bushels, many of the big traders think the near term futures contract we be trading around $10. If we do see a rally I think it will be short lived. We have a huge South American harvest, and don’t forget we had a drop in our winter wheat acres this past fall. These acres are often double cropped with beans. No winter wheat means full season beans, a better harvest and better yields. Take advantage of the next few big rallies there may not be too many down the road.
WHEAT: I am hearing that the funds are still heavily short this market. The farmers have very little supply left to move, so if the funds start to buy back their short positions there will be very little resistance there to keep prices from moving higher. Right now we are entirely fund driven. Until we get more competitive with our exports, or the funds start to reverse their position I think you will see the market continue to chop around. 
CATTLE: I am thinking we might see an additional push higher, but from there a probable pull back is in order. Look to exit any long positions and move to the sideline.

If you need any more information please don't hesitate to call or e-mail.

Kevin Van Trump

You May Get Another Chance to Hedge or Price Your Grain!

Apr 16, 2010
It looks like we might see the market move a little higher in the coming days. One simple reason is because the funds are starting to rev up their buying programs once again. I am absolutely certain they are trying to find ways to get long this market. We have had some significant gains as of late in energy prices, a recovering global economy and more and more talk about inflation and rising interest rates. This all points to increased fund buying. 
On the opposite side of the fence, farmer selling has slowed dramatically. Farmers are busy trying to get into the fields to begin their planting. Selling and moving grain is not on their agenda right now. 
You factor in more buying from the funds and less selling from the farmers and we have a recipe for higher prices. It is that simple.
I think this imbalance could continue to push the market higher at times during the next few weeks or at least until we can reach a level that peaks farmers interest or they have completed their planting efforts and can once again give some attention to moving more grain. 
Don't be surprised if you continue to see the market rally some in the next few weeks with heavy fund buying and a little weather premium being added back into the price. 
Ultimately I think we will still be heading lower unless we experience significant problems during the growing season. If you are behind on pricing or hedging these next few weeks may provide you with some opportunity.  
Remember, we are seeing near perfect weather and fantastic soil moisture conditions across most of the Midwest, making it almost certain that the farmers are going to get planted the 88.798 million acres of corn the USDA has anticipated. The question now has to become will they plant even more? 
Take advantage of some of the opportunities that the market may give us in the coming weeks.

Kevin Van Trump 
Founder Farm Direction
Call or e-mail if you need some help or would like to talk more. 

My Thoughts on Cattle Prices

Apr 12, 2010
I have had a lot of question as of late about the cattle market, and in particular where I think we are headed. To start with we have seen demand pull back just a bit, but it still remains strong. The word I am hearing from some of the bigger players is that if demands continues to stay strong we will see combined Choice/Select cutout values up in the $170 range very quickly.  I think you also have to keep an eye on the beef markets very strong tendency to rally late during the month of April.  I read recently that within the last 12 years the combined cutout during the month of April has gained by an average of  $5.44, this makes $170 look like a no brainer. So in the short term, I think we are headed higher.
If you are looking for me to make a prediction, I guess at this point I would have to figure FOB Steer price will try and test the $101 level (2008 high). 
Personally I think once we make this last late seasonal push we will start to see a significant pull back.  My concern is that the packers have a fairly extensive inventory of cattle starting to stack up, and therefor will not be driving the markets higher or trying to chase prices just to keep their doors open like they have been forced to in the past.   Not to mention the fact that I think many large speculators and others who have been long this market will start to take profits off the board and cash in their chips.  With limited buying from the packers and the speculative traders needing to sell in order to offset their profitable long positions, I think we are due for a significant pull-back after a short push higher.
In summary, Look for the market to start fizzling out after another seasonal push to new highs.  If you haven't locked in any at these levels I would advise seriously considering it. 

You missed the $4.00 corn, you missed the $12 beans and the $6 wheat...what do you do now?

Apr 09, 2010
You missed the $4.00 corn, you missed the $12 beans and the $6 wheat...what do you do now? 

I have been getting this question a lot as of late.  If this sounds like your predicament, I urge you to become proactive and get some type of plan or strategy in place sooner than later. Rather than spending time analyzing market sentiment or rationalizing the countless theories about why and where the market is headed, lets just say we could go even lower. 
Simply take corn as an example. I think last year may have actually been our first real indication of how powerful the genetics have become. We didn't have the best of growing season and produced a record size crop. 
As of right now, many of the guys out in the field are telling me they are way ahead of last year and are chomping at the bit to start planting.  If this holds true, and we simply assume we have a better growing season than last year, you have to believe we will see yields in excess of 170 and number in the 14 billion area start to circulate. If this happens corn could easily dip below the $3 level and might stay there for sometime. 
Another concern I have is that farmers love to plant corn. They often try and offset the lower prices by planting more corn because it gives them higher yields (they believe higher yields will help offset the lower prices). if this holds true we will actually see planted acres creep even higher and more corn actually produced. 
Sure I think we could see a weather type rally in the coming months, but so does everyone else.  In fact I believe the inflated weather premium is the only reason prices are this high, without that fear we would be considerably lower.
I think there are few ways you can play this market, and I have outlined them below. If you need more specifics just let me know and I will give you all the  help I can.
Selling Calls
They have taken some of the volatility out of the call premiums  as of late, but you could have been selling Dec $4.50 calls all day long last week collecting $0.20 in premium ($1,000 per contract).  I love selling calls in these types of markets simply because you can often generate fantastic revenue to help offset the lower prices. Obviously I would only advising selling the number of calls you are equally comfortable with pricing on the cash side. 
example: If you where comfortable selling 50,000 bushels of corn at $4.50, then you could simply go out and sell the Dec $4.50 calls.  You would have needed to sell 10 contracts (5,000 bushels each), and you would have collected around $10,000 in premium ($1,000 x 10). For those of you who have never sold calls, yes that money goes directly into your account.  If upon expiration the December contract is $4.50 or below then you will have a net gain of $10,000 on that trade. If the market rallies up and settles above $4.50 on expiration you would owe $500 ($50 x10) for every penny above $4.50.   But since you collected $10,000 ($0.20 premium each) you are at break even clear up to $4.70.  That means the market would have to settle above $4.70 for you to loose a dime of your own money.  If that happens all of our worries are over as we have been able to market and sell or actual cash corn at some really good prices along the way.   As a producer I just think it is a no brainer with these type of market conditions.  No to mention the extreme carry that is currently built into these markets, we will see these contracts depreciate in value more and more each month as they approach expiration.  Your main risk is a settlement above the strike price plus any premium you have collected. Also remember that by selling the options you are by no means obligated to hold them until expiration, if you think the market conditions are changing or the positions start to move against you, you can exit the trades.   
Sell Deferred Futures
I also like selling deferred futures contracts. I know some of you only like playing the options game, but you may want to consider a small play on the futures side.  We have a very healthy carry built into each of these markets.  I believe right now in corn we have a bout $0.04 a month.  Simply stated this means that if you where to fast forward and project the December contract price out into the month of July we would see the price deflated by $0.15 to $0.20 from where we are currently at. That means basically if everything stays the same the December contract will natural fall in value by $0.15 to $0.20. In theory if we rallied $0.20 in the cash price between now and then the December contract would be at the exact same price you sold it and actually would not have realized of those gains.  That makes for a fairly nice return, not to mention you are completely protected and making penny for penny if the market breaks lower.  The downside is once again any large significant rally, but that will hopefully bail you out on the cash side.
If Your A Consumer (Ethanol Plant, Feed Lot, etc...)
I think the logical play here is to sell puts. You are going to collect nice premium. If the market rallies up you will get to keep the entire premium. If the market breaks lower you will have the opportunity to buy corn at some great prices.   I am certain I'm not telling any consumer anything they haven't all ready heard or put into effect, but rather simply stating the obvious. 

Current Marketing Positions
For us we are going to continue to sell calls and collect premium.  We have 30% of our new crop hedged as we are short calls and long puts (2:1 ratio) in corn, beans and wheat. We will be very patient with our final 30% of our wheat still to price waiting for very significant moves, we will be a little quicker to price the corn and beans. My hope is to get another 30% priced before August 31st.  If I cant, because the market simply won't rally to acceptable levels, I will attempt to generate revenue and income by selling Calls.  If the markets doesn't rally up and give me the opportunity to price another 30% at least I will have made good money by selling premium during the whole process.   

70% priced @ average cash price of $5.43 
Soybeans 40% priced @ average cash price of $10.25 
Corn 40% priced at an average cash price of $4.05 
Kevin Van Trump 
Founder Farm Direction
Call or e-mail if you need some help or would like to talk more. 
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