Over the last two weeks, corn and soybean prices have moved higher on South American weather concerns. Now is not the time to be complacent.
As 2011 winds down, grain producers are looking ahead and wondering how aggressive they should be selling next year's crop. Over the past year, sales that were made early created disappointment when prices rallied. Many felt they made mistakes. Yet, when bull markets end, they have a tendency to do so quickly, and are sometimes very unforgiving. That has been the case this year. Sales made early serve a key function rewarding value and shifting risk. You should not abandon that approach.
A fence strategy is an option strategy where you can reduce the cost of an option you are buying. The mechanics of a fence strategy are buying a put and selling a call, or buying a call and selling a put, depending on your perspective. Typically, livestock or grain producers will have an interest in buying a put and selling a call in order to protect unpriced inventory (yet to be produced, ready for market or in storage). However, the end user of a commodity, such as feed buyers, would have an interest in buying a call and selling a put.
As winter approaches we take time to reflect on the past year. The year of 2011 certainly had its challenges for many, as adverse weather conditions tested many. Yet, many also experienced record high yields and record high revenue. For all in agriculture, if we step back and pause for a minute, we will likely recognize that we are in one of the the most sought after and desired occupations in the world. For that we give thanks. For those that received high prices and high production, there is extra gratitude.
If you have recently finished harvest, you might have a significant amount of inventory that is unprotected from a price decline. Storage has been a good alternative in recent years. However, the market is currently priced at historically high levels, and with uncertainties in Europe, as well as the potential for large South American crops, prices could come under pressure. Therefore, holding too much unpriced crop could mean big risk.
Although it appeared both the commodity and stock markets rebounded on the heels of positive news developments in Greece the last couple of weeks, the unfortunate story is that there are many chapters left to be told. Volatility will likely continue to be high, at least in the foreseeable future, as debt concerns in other European countries (namely Italy, Spain, Portugal and Ireland) come to light. These countries need time to get spending under control, people back to work, and earn a positive economic view from the rest of the world.
When it comes to marketing, there probably is not an approach that is all right or wrong. However, after observing farmers for over 20 years, some of the most astute and progressive producers, year in and year out, do a great job of marketing. They have three key points, or areas, of focus. These are time, knowledge, and discipline. As a visual reference, think about an isosceles triangle, that is a triangle that has equal sides and has three points. If you draw a circle connecting each point, you end up with the shape of a wheel with a triangle in the center.
Cattle futures are in a longterm uptrend, with prices recently topping just under $130 on April futures. On Friday, October 21, the USDA released its monthly Cattle on Feed Report. The placement (cattle placed in feedlots) figure was 105% of the previous year’s figure. This would imply there could be a back-log of cattle headed to the marketplace during the winter months, most likely around April. A defensive posture is warranted. Conditions currently provide an opportunity for producers wanting to protect high prices for live cattle.