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'Higher prices is biggest risk,' says analyst

Agriculture.com Staff 05/24/2006 @ 9:19am

Now is the time for all farmers who are contracting crops for 2006, 2007, or 2008 to start buying calls, John Roach, Roach Ag Marketing, Ltd, said in his daily newsletter on Wednesday.

Roach was asked to answer the following market scenario of one of his customers. "I took mine (calls) off at the sell signal. I know we just came off one (sell signal), and I am questioning if I should have done that. Also, if we purchase the calls, what month should we go into? I was in December and was actually spreading the calls and left the top side on, if it is time to purchase, should I clean them off (December 3.30's)," the customer asked.

Roach is sticking with his recommendation of buying calls to cover the risk of a big weather rally. "Twice this spring, I have recommended buying calls and both times were on the breaks that occurred after a sell signal. Usually these calls expire worthless, but with the bullishness of outside markets and the absolute necessity to raise a big crop, I encouraged you to buy them this year."

Roach added, "I have not recommended selling higher strike price calls over the top of the calls we have purchased. I am worried about the potential of a big price move with all the new money in our markets. Besides, the time to sell the calls over the top is during a weather worry and we haven't had one this year."

Most farmers are positioned for a big crop and LDP payments this fall. Because selling ahead has worked for the past several years, most farmers have more bushels sold than normal, Roach said. "I worry that farmers are not prepared for a big run up."

In his newsletter, Roach stated his concern for the farmer's business if weather reduces yields. "What happens if you have few bushels to sell at higher prices, and there is no LDP? I believe the biggest risk for most farmers is higher prices. Calls will cover that risk and if they expire worthless (as most of the insurance you buy does) the expense of the calls will not have a big impact on profitability."

Roach stressed that now is the time for all farmers who are contracting crops for the next three crop years to start buying calls. "Space your purchases out over the next two weeks. Don't wait until weather forecasters start talking about a "dome."

Meanwhile, recent negative news may further pressure corn prices, Roach said. "World health officials worried Wednesday that six deaths within one Indonesian family may have resulted from human-to-human transmission of bird flu. Informa released their corn acreage estimate up 1.8 million acres from the March 31 USDA estimate."

Roach added, "We will likely have another sell signal in corn before we get through this year's March through June selling season. I will wait for that sell signal to make more sales. Our marketing plan is to have sales made on all the bushels you cannot store this fall and puts on all the bushels you will store by the time corn is in pollination."

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