Evening Report (VIP) -- Advice -- March 19, 2014

March 19, 2014 10:11 AM
 

Hog Advice: Build price floor with lean hog put options… We have stayed out of coverage in lean hog futures to allow the parabolic run in the market to play out as much as possible without racking up unnecessary costs of continuously rolling put option coverage higher, but we can't wait any longer to build a price floor. This morning we advised hog producers to cover 50% of expected second-quarter hog marketings and 50% of expected third-quarter hog marketings by buying $126.00 June lean hog put options for $3.90.

 

FOMC continues to taper its bond buys... As expected, the Federal Open Market Committee (FOMC) stayed the course and reduced the pace of its bond buys by another $10 billion per month, beginning in April. The FOMC statement also included a shift when it comes to using the unemployment rate as a guide for raising interest rates.

The statement details, "even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." It will use a broad range of measures when it comes to making this decision. The FOMC statement noted that economic growth slowed during the winter months, "in part reflecting adverse weather conditions."

While inflation has been running below the FOMC's longer-term objective, it says the outlook for long-term inflation has remained stable. The committee anticipates that with "appropriate policy accommodation," economic activity will continue to improve gradually. More here.

 

Ethanol production improves... For the week ended March 14, the Energy Information Administration (EIA) reports ethanol production rose 22,000 barrels per day (bpd) to 891,000 bpd. This takes the four-week average to 890,000 bpd for an annualized rate of 13.64 billion gallons. Ethanol stocks declined by 4% to 15.3 million barrels due to ongoing issues with rail traffic to the East and West Coasts.

 

FSA's farm bill fact sheet... Now that the 2014 Agriculture Act of 2014 has been signed into law, focus has shifted to USDA's efforts to implement and interpret the new provisions as well as to educate farmers on the choices and safety net tools it offers them. In line with these efforts, USDA's Farm Service Agency has issued a "2014 Farm Bill Fact Sheet," detailing what it offers FSA customers. Click here for a link to this document and other farm bill resources.

 

PF midweek marketing game plan update...

Corn: Hedgers have 70% of 2013-crop production sold in the cash market, while cash-only marketers are 60% priced on old-crop. Hedgers and cash-only marketers have 30% of expected 2014-crop production sold via cash forward contract for harvest delivery. Use price strength to get current. We are willing to wait on signs the rally is running out of steam before advancing sales.

Soybeans: Hedgers are 100% sold on 2013-crop production in the cash market, while cash-only marketers are 90% sold on old-crop. Hedgers and cash-only marketers have 25% of expected 2014-crop production sold via cash forward contract for harvest delivery. Use price strength to get current with old- and new-crop sales. Cash-only marketers must continue to hold some old-crop in the bin in case the market takes off again as old-crop supplies are tight. We are willing to give November futures a chance to push further to the upside before advancing sales.

Wheat: Hedgers are 100% sold in the cash market on 2013-crop production, while cash-only marketers are 90% sold. Hedgers and cash-only marketers are 50% forward priced on expected 2014-crop production. Use price strength to get current with that advice. We'll wait on a sign buying is exhausted before increasing new-crop coverage given heightened political tensions in the Black Sea region and concerns with the U.S. HRW wheat crop.

Cotton: Hedgers and cash-only marketers have 75% of 2013-crop production sold in the cash market and 25% of expected 2014-crop production sold via forward contract for harvest delivery. Use price strength to get current with advice. Old- and new-crop cotton futures are proving to be resilient, but signs of a technical breakdown would be advice to increase sales.

Cattle: Fed cattle producers are long April $136.00 put options at $1.325 covering remaining 1st-qtr. and 50% of 2nd-qtr. marketings. The April $144.00 call options were exercised into a short position, meaning we are effectively hedged on 1st-qtr. and 50% of 2nd-qtr. marketings at $144.20 (the strike price plus the 20 cents we made on the initial sale of these calls compared to what we spent on the puts). Stick with these positions for now.

Hogs: Hog producers were advised this morning to purchase $126 June lean hog put options on 50% of expected second-quarter marketings and 50% of expected third-quarter marketings. The $3.90 premium puts a floor on these marketings at $122.10. If futures continue to rally, we'll use price strength to "average up" our coverage.

Feed: All corn-for-feed and meal risk is carried in the cash market. We aren't willing to chase the market higher by locking in current prices, but would use a corrective pullback to lock in some coverage.

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