Monday, July 25, 2011

Grain Market Comments 7-25-11 Re-Ownership Options

Markets closed weaker today behind weaker outside markets lead by fund selling and weather that has seen moisture in many of the dry areas.

Corn was down 11 cents, Beans where off 16 cents, KC wheat was down 10, MPLS was off 8, CBOT wheat was down 4, European wheat was off about 1 %, the US dollar is near unchanged with the Cash Index at 74.110, crude was off about 60 cents a barrel, and the Equities struggled behind the inability to come up with a resolution to the debt ceiling as the DOW closed down 88 points.

Disappointing day for the grains but with the moisture that much of the dry areas received the price action wasn’t that surprising and with the weak tone the outsides had it could have been worse given the fact that we are still around a dollar off of our lows seen at the start of the month.   If one looks at the markets or charts from where we closed today at versus where they opened up at on Sunday night we really didn’t do much damage as many of the grains closed very similar to where they opened last night’s session; with a couple of them closing better then where they opened Sunday night at; so nearly all of the grains had either small candles or Doji’s left on their charts.  Technically the charts say to me that they are waiting for some catalysts be it weather or maybe the outside markets, or another supply/demand factor to help determine which direction the move will be.  Bottom line is my view on today’s technical price action wouldn’t be considered either bearish or bullish; just stage setting for the next big move.

Basis on some of the grains is starting to feel a little top heavy as we have seen bids soften as of late and for more then one commodity.  Buyers are showing coverage and a lack of demand in comparison to their interest over the previous couple of weeks/month.  It is still up in the air how much actual coverage buyers have on the various products but bids are softer.

As a reminder we are going cash, condo, or contract only for winter wheat at our locations.  Please call us for more details.

In regards to marketing you still have some options that you can do that help one retain ownership or control the pricing of one’s wheat despite us going to cash/condo/contract only. The two main options that one has are two different type of contracts, a basis contract or a min price style contract in which we offer two a regular min price contract and a min-max contract.

In a basis contract one is simply locking in the spread between our cash price and the futures price; right now as example we have a basis of -95 the KC Sept futures for winter wheat in Pierre.  If you do a basis contract against the KC Sept futures at 95 under your price would then follow the KC Sept futures not our local cash price; so as example if KC Sept was at 9.95 and you decided to price the futures portion of your basis contract you would receive 9.00 for your wheat.  If KC Sept went down to 6.95 and you priced the futures portion you would only receive 6.00 for your wheat.  The cost to a basis contract is nothing, there is no storage against the grain either and basis contracts automatically roll at that spread between future months around the 20th of the month prior to the contract going off the board; so for a basis contract against the Sept futures you would have until August 20th to price the futures or your contract would be moved to the Dec futures at what ever the spread between the Sept and Dec futures is on August 20th.

Benefits on basis contracts is you have unlimited upside with no cost nor a timetable in which the grain has to be priced by; but on that same token you have unlimited downside risk and you can not participate in basis appreciation or if the basis narrows.  Presently basis is about a dollar a bushel better then it was a year ago; so just looking at that it maybe makes sense to look at this type of contract if you want to price your grain at a later time.  Please call if you have questions.

Min price contracts and min-max contracts are options that create a floor or a worst case scenario for one in marketing their grain.  I many times refer to these contracts like insurance in that you basically will be buying insurance so the better insurance you want with the lower the deductable and the longer you want the coverage the more they will cost you.  With our markets a little on the volatile side these are not exactly cheap; but they do help one create a worst case scenario while leaving upside room should the market move higher.  As an example one could do a min price contract using Dec CBOT wheat futures for about 6.15 min for delivery into Pierre.

One wouldn’t have margin calls and the cost of the contract would just come off of one’s price received.  The above example would expire on Nov 25th.  If one wanted to go out longer it could cost more; if one wanted to try something without the big cost you would have a couple of options.  Go with a strike that is out of the money; the above was with an option at the money or at where the futures closed at.  For a strike price 50 cents above the market one would be able to get in for about 20 cents less or for about 6.35 net min price.    The difference being that if these contracts expire and one hasn’t exited the cheaper option would be further behind then the one at the money.

The last type of contract we offer is called the min – max contract; it is a contract where one sets a floor and ceiling; as example via using the 8.00-9.50 CBOT DEC Wheat strikes one could create a min price contract of about 6.52 with a max price of 8.02.  For one to achieve the max price we would have to have Dec wheat at or above 9.50 when the min-max contract expires.  This is an example where one is only spending 24 cents but has a chance to add on a 1.50; it is out of the money and the probability of the market running up that much might not be that high based on some opinions out there.  But it is a cheap way to have re-ownership with the only cost being known and upfront thus it might be an option for some to consider.

If you have questions on any of the above please feel free to give us a call; also note that we do offer a full line of hedging services threw our country hedging branch thus opening another way to participate in the market once the actually cash grain is priced.

Thank you

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