Market Outlook: Advisers Fare Better than Average

March 2, 2011 01:52 AM

Advisers Fare Better than Average

Given the marketing decisions producers have to make this year, we thought it would be relevant to take a look at the role a professional adviser can play in an overall marketing plan. Below are
the average adviser sales levels compared to the national average.

"It is not practical to think that these advisory services will be right all of the time, but this data shows that during the past five years these services have exceeded the national average price nearly 70% of the time," notes Scott Harms of Archer Financial Services.

Choosing an advisory service can be a challenge. Understanding the adviser’s philosophy as well as risk level are important factors. Marketing consistency is also a key consideration.

corn sales levels chart

No Certain Doom for Egyptian Wheat

Protests and violence in the world’s biggest wheat importing nation garnered market attention, but how developments in Egypt will affect trade and prices long-term is an open question.

"I think it has had some impact," says Darrell Holaday of Country Futures Inc. in Frankfort, Kan., "but it has been minimal. The initial news of protests in Egypt actually supported commodity markets.

"Everything tagged along with oil because of the corn-to-oil connection," Holaday says.

Hungry for Wheat. Egypt’s appetite for U.S. wheat has been growing in response to reduced supplies from other exporting countries and food supply developments within Europe, particularly
Eastern Europe. In late December, a report from the USDA Foreign Agricultural Service (FAS) in Cairo predicted that Egyptian wheat imports from all sources would increase this marketing year to 10.2 million metric tons, up 13% from this past season and up 3% from two years ago.

FAS said the government buying agency, the General Authority for Supply Commodities (GASC), was building reserves "in the face of an uncertain domestic and foreign wheat situation." The FAS report projected Egypt would import 3.5 million tons of wheat from the U.S. this year, which is more than double from two years ago and more than fi ve times this past year’s volume.

"They use basic No. 2 soft red winter wheat from the United States as their standard for quality," says Steve Mercer, communications director at U.S. Wheat Associates. Price is first priority for GASC buyers, followed by quality. If they can buy a similar quality and class of wheat from Russia, Kazakhstan or Ukraine at similar prices, they will buy there. U.S. prices for milling wheat are high, but they still are among the lowest in the world, Mercer says.

However, news reports suggest that supplying the diesel fuel used to unload and haul wheat from ports to mills may be a challenge. "The government has told us they are doing all they can to move wheat into the supply system," Mercer says. U.S. Wheat Associates has not seen a disruption in wheat sales and shipments to Egypt.

Country Futures’ Holaday figures the Egyptian developments raise questions in the grain trade about whether GASC will continue to exist and how Egypt will buy wheat. Long-term, if a transition of power leads to more effi cient markets in Egypt, changes could be bullish.

"I don’t want to make the Egypt situation out to be more than it really is," Holaday adds. "I don’t think anybody believes they’re going completely away. In the end, I think Egypt will buy the next 300,000 to 400,000 tons soon."

"It appears all of these advisory services have quickly adapted to the volatility of today’s markets," Harms says. While 2008 saw unprecedented challenges, in 2009 the advisers rebounded to beat the national average by more than 15%. "That is adapting well to difficult marketing times," Harms notes.

Five Themes Created by Market Volatility

Today, it’s hard to have a discussion about grain or agricultural markets and not use the word "volatility."

Sterling Liddell, vice president for Rabo AgriFinance, says numerous factors are causing volatility. Instead of losing out because of the ups and downs, farmers should try to view these times as opportunities.

Currently, Liddell says, foreign weather, external government policy and energy prices are all contributing to the uncertainty. Liddell says that five major themes have surfaced during these volatile times:

  1. The supply and demand side of corn has dramatically changed. It is subject to policy from other countries more than we’ve ever seen in the past.
  2. Margins are going to be squeezed, and risk management needs to be used to address this.
  3. Expect to see the price of inputs increase with the price of commodities.
  4. Fund money has come in stronger than it’s ever been. Fund money can enter and exit quickly.
  5. At the moment, land values are going up. Commodity prices are strong, so they should keep land values up.

Ethanol Blenders not Slowing

ethanol pumpUSDA increased its projection of ethanol usage of corn by 50 million bushels this past month, which is not a huge surprise. The agency also increased its projected corn usage by 20 million bushels. Since stocks were already so tight, USDA reduced ending corn stocks by 70 million bushels, making year ending stock about 5% of the country’s expected consumption. Many consider this to be just a pipeline supply, says Darrell Good, University of Illinois economist.

"The balance sheet says we will be out of corn by the 2011 harvest. We need to control consumption for the rest of the year, and we need to motivate acreage," Good says. "The question is, at what price do we say we’re serious and have to slow down consumption?"

The rapid rate of consumption means there are no plans to ration ethanol anytime soon. In recent weeks, the pace of ethanol usage has slowed, but it is still 8% above 2010 in weekly ethanol production.

With the blender’s tax credit of 45¢ per gallon, however, there is little incentive for blenders to signal a slowdown, Good says. The tax credit guarantees blending will be profitable. So if ethanol prices are above gasoline, yet you get a 45¢ per gallon tax credit, that’s incentive to go ahead and blend.

"We are going to have to keep that pace coming down if we don’t want to run out of corn," Good says.

Window of Opportunity

With feed costs soaring, many livestock producers have already locked in revenue and costs, but it’s not too late for those whose risk is still wide open to get some protection.

cows marketoutlook"In general, for live cattle and feeder cattle producers, I recommend they lock in their downside risk by buying put options, but with markets as volatile as they’ve been, options have been extremely overpriced," says Steve Biehler, a market analyst with A.P. Brokerage, Chapman, Kan.

Because of the high cost of options, Biehler recommends using a window strategy: buy put options to protect the downside, then sell call options above the market to offset the cost of the put option. For example, in mid-January, Biehler recommended that one client, a producer raising feeder cattle, buy August put options at $124 at a premium of $4 per cwt. This client then sold August call options at $130 for $4 per cwt., offsetting the cost of the put option. In effect, Biehler’s client locked in a price fl oor at $124 per cwt. while capping the upside at $130 per cwt., leaving a $6 per cwt. window.

Selling options, such as futures, requires a margin deposit, but using a window might allow producers to take advantage of a market rally. If the buyer of the call option exercises the option to own a futures position at the strike price of the call option—in this case, $130 per cwt.—it would allow a $6 per cwt. higher fl oor than the $124 floor established by the put option. Selling futures would not provide the same opportunity.

A window can be a particularly attractive strategy for highly leveraged producers who borrow from the bank to buy cattle and pay for feed.

Forget About the Top

Contrary to some advice, producers should focus on strategy 80% of the time and outlook just 20% of the time. That’s the advice of Scott Stewart, president and CEO of Stewart-Peterson. When you make it all mathematical, you get away from trying to outguess things, such as whether it rains in Australia, acreage reports, etc., he says.

The problem for many producers is that they try to outguess the market, Stewart says. "Two-thirds or more of producers don’t sell when the market is going up." They end up forward pricing just 1% or 5% of their crops, while 95% of the crop beats them to a pulp. "You have to think about the whole crop.

"With options, you may need to use a lot of them to get the job done. If 70% are owned for the crop in a bull market, you end up with a pretty darn good average, and the same in a bear market," Stewart says.

The goal should be to minimize the price difference between your price and tops and bottoms in the market, he adds.


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