Comfortable Changes

Below is a rough draft for a newsletter article that I did up.  Won't come out for a few weeks; but here is a sneak preview..........

Comfortable Changes

Ok…… I do really struggle writing an article for newsletters because of the fact that our grain markets are ever changing and by the time a newsletter gets put together, proofed, and sent out our markets may have changed dramatically.  No one really knows the future the only thing we know is that there be will change.  Our markets are called futures markets just for that reason; that we don’t know what is going to happen with them in the future.

All we know is that there will be change; and plenty of change in prices is what we have experience in the past few years.  Did you know that since our bull markets started in June of 2010 we have had well over 100 (I stopped counting at 100 with 10 months left) moves of 30 cents or more in a couple day period in the KC Wheat contract.  It was just a few weeks ago that we seen beans up about a dollar a bushel in a week or so; follow by down about a dollar a bushel a week or so later.  After a bullish crop report we seen beans move 85 cents from their highs to their lows.  Not mentioning the swings we have had for the other grains like spring wheat, sunflowers, and corn.  Bottom line is our markets are always changing.  So much so that I could never write an article for a couple weeks in the future without expecting some major changes.

Ok I think everyone knows that our markets are always changing.  That we determined and is well known.  What is more important is what we do with those changes; are we able to manage them.  In grain marketing with grain price outlook do we make decisions that are fearful or greedy?  Do we put our self in a situation where we are forced to make bad sales at the wrong time?  Do we fail to make sales when our gut is telling us to sell at nice profitable levels?

Each of you know your answers to the above questions; but with our every changing markets are you able to adapt in a comfortable way?  Do you have a marketing plan that leaves you comfortable at night?  A pro-active risk management strategy that allows you to be successful in the future whether the crop prices for corn, wheat, soybeans, and sunflowers go up, down, or sideways? 

At the end of the day the message is simply get comfortable in our changing market.  For some of you that might mean writing a marketing plan which is something we would be happy to help you with .  For others it might mean simply having a solid crop insurance plan.  Others it might mean making scattered profitable sales to help avoid the extremes price swings that we seem to have.  Many of you might use put options to help protect downside risk in our markets.  Some of you might feel you need to re-own grain sales in case you sell to soon or use min-price contracts.  We can help you with all of these.  Bottom line is your Midwest Cooperatives Grain Marketing team is here to help you find your comfort zone in our ever changing market.  Don’t forget we have all sorts of tools to help you in your grain price risk management; such as the min price contracts, weekly marketing meetings, helping of writing grain marketing plans with the ability to tie in everything from finance to inputs to the sale of grain, and a Country Hedging Branch Office.

So there you go; that is my preach. Get yourself comfortable!

Info on Option Trade of Week- Bull Call Spread Min Max Contracts

Market Comments and Info on Types of Contracts

Below are market comments as well as some info to better help one make a decision in regards to how to market the crop.

Markets ended the overnight session in positive territory with most of the grains up 2-5 cents.  Talk still remains centered on weather which isn’t as hot and dry as it was the last couple of weeks and that has a little pressure on the grains.  The other big thing is the possible debt default by the US and it’s possible effects on the outside markets and markets and economics around the world in general. 

At about 10:50 we the markets trading both sides; corn is up 3-4 cents as it appears to really be consolidating especially versus the type of moves we had been seeing over the past several months, MPLS wheat is off a penny, KC wheat is off 2-3 cents, CBOT wheat is off a nickel and beans are up 14 or so. 

Outside markets have a weak US dollar with the cash index at 73.604, crude is up about 20 cents a barrel well off of it’s lows and the equities are struggling with the DOW off about 70 points.  Trading action has been on the choppy side with ranges that are tight versus what we have been seeing.

We did have an announcement that Egypt once again bough Russia wheat because of cheaper prices.  That has help pressure the wheat a little bit and reminds us that we are not exactly the only seller in town anymore.   We do appear to need wheat acres for next year; but right now that doesn’t seem to be a big concern.  The spring wheat crop tour is happening and we should be seeing updates threw out the week.  With the crop behind development it will be interesting to see what the tour comes up with.

The markets did manage a nice little turnaround as at 1:30 last trades (not closes) are showing corn up 13 cents, beans 17 better, KC wheat 10-11 higher, MPLS 10 better, and CBOT wheat up a nickel or so.  The outside markets haven’t changed much in that the equities are slightly weaker with the DOW off 43 points, dollar under pressure and crude 40 cents better.  As for the reasoning on the bounce for wheat that only thing I have really seen has been corn’s strength, the weak US dollar, and dryness in the south as it relates to planting ideas and next year’s acreage.

Technically today’s bounce didn’t do much for either the bulls or the bears; as we continue to have chart patterns that look sideways or in consolidation mode waiting for a new catalysts to determine breakout direction.

Basis feels softer today on the wheat markets; spring wheat in particular as it appears we have the inverse starting to work out of that market.  Winter wheat is seeing pressure from South Dakota harvest and we appear to be lacking the freight concerns and export business that was a major part of the rally/basis appreciation seen over the past several months.

We have started to see more scab and vom in wheat coming into the elevators; please make sure to turn the combines up to try and blow as much out as possible as high levels can make the marketing of that wheat very difficult. 

**********************************Info on marketing and types of contracts********************

Below is a power point file that also has some information on basis contracts, min price contracts, and min max price contracts.  The 1^st thing that I would recommend before deciding which tool might be best for you is to determine one’s outlook on the market.  Based on that outlook you look at the slide above on marketing strategies and see which strategies fits your outlook and the lastly you consider the risk/reward if your outlook is correct or if your outlook is wrong and use that information to help you make a good risk management decision.  If one is risk diversifying then doing a combination of cash sales, basis contracts, min price contracts, and min-max contracts is what probably makes the most sense to do.  Then again if one is pro-active hopefully one has done the marketing that they want to have in place before the elevators go cash only which seems to happen each year.

Please give us a call if there is anything we can do for you.

Thank you

Below are slides showing the different type of moves possible depending on one’s outlook in the market; as example we are cash/contract only for winter wheat right now.  If one expects the futures price to go up then possible action includes a basis contract, min price contract (of which we offer a couple different kinds), Sell cash and buy calls, or sell the cash and buy futures.  If one is bearish then one simply sells the grain and uses no sort of hedging or one writes a contract

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 20^th 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 20^th 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 20^th.

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 25^th.  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