Be aggressive. Be conservative. Be aggressively conservative.
Mar 28, 2012
Guest blogger Bryan Doherty, senior market advisor with Stewart-Peterson Inc., has some ideas to help you protect yourself from getting beaten and bruised by the planting intentions report.
There’s a lot that you and I know. For instance, we know that intentions, weather and world events change. For that reason, I recommend that you not get too worked up about Friday’s planting intentions report. Certainly, respect the report. More importantly, prepare for surprises by becoming what I call aggressively conservative.
Let’s think about what the report can mean for the market. If the estimate for corn at 95 million acres is accurate, or if it comes in higher, the market will have a hard time rallying, unless we see a significant weather event down the road.
Right now, a lot of signs point toward downward price pressure on corn, high acreage being one of them. With a high amount of acres planted and prevailing good weather, you could be dealing with a price risk of anywhere from $4.50 to $4.
To be ready for this, get enough corn forward sold – enough so that you’re comfortable it will make a positive difference if prices drop. Then, buy puts on enough corn to shore up any real concerns that if there’s a washout in the market, you’ve done yourself a real favor by being defensively positioned.
Purchasing a put gives you the right to sell but not the obligation to sell. It acts like an insurance policy that puts a floor on the market yet leaves your expected production with an unlimited potential to appreciate should prices rally.
Strategically, I recommend you think in terms of balance. Looking at December corn near $5.50, it’s easy to make an argument for it to drop $1.50 or more. It’s just as easy to support an opinion for prices rallying to all-time new highs. The solution is to position for whatever the market may do rather than try to out-guess acreage and weather.
This is what I call an aggressively conservative approach. It means being positioned with all of your production for the market to move strongly in any direction. The idea is to capture upside if it’s there and position against major downside risk. Another way to put it: protect yourself from getting beaten and bruised.
What might you avoid doing? Positioning strongly for one direction, or doing nothing at all ahead of Friday - that would be taking an extremely aggressive approach.
To be clear, marketing isn’t quite as simple as forward contracting some production and buying puts on the remainder. There’s a lot to think about as you plan strategies, and many types of options strategies exist. At the same time, with some prior planning, there’s no need to stress over the upcoming report.
Typically, this report stirs emotions because it’s a big news event in a time a year when news events are sparse. There’s a lot of guessing going on. As the buzz grows, so too does anxiety. Plus, history has indicated that the market can move aggressively after the report. Despite this, unless there’s adverse weather, what really moves the market is the planting season getting started in earnest, which is when planting picks up in the South and pushes into key states like Illinois, Ohio, Indiana and Missouri during early April.
Do you remember last year’s report? The acreage intention number was high, resulting in a bearish reaction. Then, rain fell in the East and some producers abandoned crop ground. The snow melt in Canada flooded our river system in Northwest, causing farmers to abandon something like 1 to 1.5 million acres of crop ground due to flooding. The actual acreage number was reduced in the June report due to problems planting the crop. Prices rallied.
For the coming growing season, weather experts expect normalcy. Even so, it’s best to think about weather as something akin to shooting at a duck that’s flying away from you. It can change direction at any moment and move rapidly. Thus, you want more options than a single shot. The same goes for your marketing.
On a separate note, if you’re interested in learning more about puts, calls and other options strategies, we just wrote a detailed report. Click here for a copy.
Bryan Doherty is a senior market advisor with Stewart-Peterson Inc. You can reach Bryan at firstname.lastname@example.org. Scott Stewart is president and CEO of Stewart-Peterson Inc., a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at email@example.com
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