A Game Plan to Profit

March 10, 2012 05:35 AM
A Game Plan to Profit

Marketing strategies for selling 2012 and 2013 crops

A marketing plan should be written down to give focus. First, outline fundamental and technical assumptions and decide what marketing tools you will use—cash, futures or options. Establish price targets and a time frame for action. Many coaches will tell you a game plan must evolve, but you still need a strategy for how to play, instead of just showing up and saying, "I’m ready!"



2012 Strategy

There is significant risk for soybean stocks to build to more than 400 million bushels this year. If this does occur, be prepared for the following: 1) cash basis levels to widen at harvest; 2) some carry to come back into the market; and 3) flat price to move below the average cost of production for many producers.

Start selling 40% of your anticipated production via cash sales in March. For the next 40%, buy $1 deep-in-the-money put options if and when November 2012 soybeans test the target prices listed below:

  • Buy 10% at $12.50 or by March 15.
  • Buy 10% at $12.65 or by March 15.
  • Buy 10% at $12.75 or by June 15.
  • Buy 10% at $13 or by June 15.

The remaining 20% of your soybean production should be sold this summer using short November 2012 futures on violation of a trend-line support.

2013 Strategy

Consider selling 2013 soybeans only if the weather causes soybean prices to rally this summer. If Novem-ber 2012 futures test the $14 level, sell November 2013 soybeans in short futures with no restriction on cash-flow exposure.

As an alternative to selling futures, buy 2013 options:

  • Buy a 2013 $12.60 put and sell a 2013 $13.60 call for 20% of anticipated production when November 2012 tests $14.
  • Buy a 2013 $13 put and sell a 2013 $14 call for 40% of anticipated production when November 2012 tests $14.50.
  • Buy a 2013 $13.50 put and sell a 2013 $14.50 call for the final 40% of anticipated production if November 2012 tests $15.


Fundamental Assumptions

  • Soybean acres will slightly increase by 1 to 2 million acres in 2012.
  • Soybeans will move back to trend-line yields.
  • While South America had some weather problems, assume slightly reduced yields.
  • China will continue to buy soybeans, but not excessively more than 2011 levels.
  • Soybean meal will continue to be the drag on the overall crush margin for soybeans.


Price Expectations

  • $13 should see serious overhead resistance for new crop November soybeans.
  • Based on the seasonal charts, expect a bounce to the upside in old crop from February to May.
  • A move back to 2011’s high will only happen if the risk of soybean yield goes below 40 bu., which won’t be realized until July.
  • Use time restrictions if price targets are not met.

Types of Sales

  • Sell 40% of production via cash starting with the first 5% in March at $12.20 basis the futures and continuing every 10¢ increase by mid-May and mid-July. Place stops below the cash market to trigger the sales based on time, not price.
  • Sell the next 40% via in-the-money puts at $12.20 to $13.
  • After mid-June, sell the last 20% via short November 2012 futures. Make sales on violation of technical support.


Selling Formula 

2012 total estimated marketing bushels: _________________
40% =______________ cash bushels.  40% =______________ put bushels. 
20% = ______________ futures bushels.
Crop insurance bushels: ______________________



2012 Strategy

My outlook for the corn sector this year revolves around building supply and stable demand, resulting in an increase in carryover. Take decisive action sooner rather than later based on strong prices. Historically, three bull years in a row because of yield decline is an abnormality.

My strategy is based on the fact that in 21 out of the past 27 years, the December corn price was lower during the first week of October compared with the first week of March.

In the 21 winning years, the total gains far exceeded the total losses. It should be noted that three of the six losing years when we sold early were 2008, 2010 and 2011.

Ethanol demand growth will start to level off, corn exports will remain strong but tempered by price, and wheat will grow as a feed source. This implies that supply will become a more dominant factor in price. After two strong price years, a trend toward demand rationing and new supply sources has begun. A multiple-year low should be expected by the fall of 2013 and then a retest of historical highs no earlier than the summer of 2015.

Cash sales. If your elevator will allow you to roll cash contracts forward, start by selling the September contract and holding the position to first notice day and then roll to the December contract. Hold the December contract to first notice day and then roll to the March contract. At that time, cash can be delivered or the final roll to July should be made in late February. If this is not an option, sell the month you’d like to deliver against and then contact a marketing representative about trading a bear spread in the futures market to capitalize on the spread movement.

I suggest a consistent scale-up selling strategy based on the September 2012 contract:

  • Sell 5% at $6 basis the September contract.
  • Sell 5% at $6.05 basis the September contract.
  • Sell 5% at $6.10 basis the September contract.
  • Sell 5% at $6.15 basis the September contract.
  • Sell 10% at $6.20 basis the September contract.
  • Sell 10% at $6.30 basis the September contract.

Long puts. Pre-buy the maximum margin requirement you are willing to spend on a futures contract. The disadvantage of this approach is that you will be required to cash-flow a major purchase now rather than incur the margin call as the market rallies. The advantages include: 1) knowing the total commitment in advance; 2) avoiding the risk of blowing out of the futures positions at the wrong time because of cash flow exposure; 3) having the net selling price improve because the cash market is going up in value.

Hold the long put position from March to late July. Once you are comfortable with crop production, you can convert the put to a cash sale or futures contract.

In-the-money puts. When September corn tests the following price points, buy September $1 in-the-money puts: $6, $6.10, $6.20 and $6.30. If no positions are filled, price by the second week of July at the market as long as September corn is above $5.50. If no action is taken, store inventory for a seasonal move in the summer of 2013.

Futures sales. If you follow the cash and put buying strategies, don’t worry about the final 20% of sales until after the June supply-demand report. The final sales will be put in futures with no upside margin call exposure strategy. If the market is in a downtrend and September corn is below $5.40, the bushels will be put in the bin and held until the summer of 2013 for a seasonal price recovery.


2013 Strategy

Next year could be an extremely dangerous year for all equities and commodity markets. Because of the potential negative influence of outside markets and the possibility of a drastic increase in corn and soybean stocks, it is a good idea to sell expected 2013 inventory this year if we see a June or July weather scare event.

Again, the problem is cash-flow exposure, which could be $1.50 to $3 depending on the severity of the yield reduction. If we see an increase in acres and yield is above 165 bu. per acre, we could see carryover of more than 2.2 billion bushels and cash prices well below the cost of production. If we see yields at 145 bu., we could see carryover well below 350 million bushels, which would rival historic highs.

Because of the potential risk of volatility, I suggest the following: 1) an embargo on selling expected 2013 inventory until the first week of June; 2) don’t sell any expected 2013 production lower than $6.50 basis the December 2012; and 3) because 2012 versus 2013 will invert, meaning the 2012 crop will go at premium compared with 2013, keep hedges in the 2012 contract and roll forward.

In summary, 2013 hedges are time-restricted to early June and then only if September 2012 is above $6.50. The odds of getting any trades in place are less than 25%.

An alternative strategy to selling futures would be buying a deep-out-of-the-money $4.50 December 2013 put and selling a deep-out-of-the-money $8 call as close to even premium as possible. This trade could be placed lower than the $6.50 target but should be time-restricted to at least the June supply-demand report. Once we are in the right time period, try to implement the position on an overbought situation with the 13-day Relative Strength Index above 70 or some other indicator of an overbought situation.

Fundamental Assumptions

  • Global financial conditions will worsen as we move into 2013.
  • Ethanol demand has crested and will fight to remain above a 5.1 billion bushel usage level.
  • Exports will remain firm but not exceed early USDA expectations. Watch for bearish surprises.
  • Planted acres will be 93 to 94 million acres.
  • Yields will be better than 2011’s, but slightly below the trend line.
  • Carryover will increase to 2 billion bushels.
  • Input costs will remain high, even with a price decline in corn values.

Price Expectations

  • Sales made in early March and/or mid-June should post more gains 78% of the time than sales made in mid-October.
  • Based on history, seasonal gains should be about $3 for every $1 lost.
  • A chart pattern such as in 1992 or 2001 is expected, where January highs will not be exceeded unless a late summer weather event occurs.
  • Sell September corn in April and May and then roll forward. Spread objective is 30¢ to 40¢.
  • Start selling September corn at $6 and be done by $6.30.

Types of Sales

  • Sell 40% of anticipated production via cash with no upside price defense consideration. Begin with 5% at the desired entry target and make incremental sales every 10¢ increase. Finish by March 15. Place stops below the cash market to trigger the sales based on time, not price.
  • Sell the next 40% of anticipated production via the purchase of in-the-money put. Buy at least a $1 in-the-money put to cap cash-flow exposure and reduce time value cost. Act as close as possible to a futures position, though.
  • Sell the final 20% of production via future sales after the June supply-demand report. If December corn is below $5.40, forgo the position and story the inventory instead.

Selling Formula 

2012 total estimated marketing bushels: _________________
40% =______________ cash bushels.    40% =______________ put bushels.   
20% = ______________ futures bushels.
Type of crop insurance:______________________        
Level of crop insurance:______________________


The information provided is believed to be reliable. There is a risk of loss associated with trading futures and options. Anyone acting on this information is doing so at his or her own risk. Consult your marketing representative before trading. To comment, send an e-mail to Outlook@farmjournal.com.



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Spell Check

3/17/2012 04:48 AM

  Why no strategy for wheat? Joan Herr

3/17/2012 04:48 AM

  Why no strategy for wheat? Joan Herr

3/19/2012 03:47 AM

  The cash market will ALWAYS be lowered by these "strategies". Only use the cash market to drive the parasites out of agriculture and enjoy a profitable tomorrow.


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