What s Moving in Markets in Top Producer January 30, Presented by Dave Fogel, Risk Management Advisor

Transcription

1 What s Moving in Markets in Top Producer January 30, 2014 Presented by Dave Fogel, Risk Management Advisor trading.com Who we are. Company started in 1979 and was incorporated in Producer marketing division began in total employees 16 commercial brokers, 27 employees branches, 29 nonemployee branches, and 7 other AP s Customer base spanning the U.S. most all states that grains are produced, processed, or fed 33 total branches offices employee and non employee. 1

2 Who we are. International customer base in Canada, Switzerland, British Virgin Islands, Mexico, Brazil, and Egypt, with other business relationships with Lebanon, Ukraine, and Tokyo. Full time economic staff. Network of around 3,500 customers Largest IB (Introducing Broker) outside of Chicago, IL Currently have a relationship with 4 different FCM s (Futures Commission Merchant) and are currently working on a fifth (before the end of the year) We have no way to predict if we will see prices like we did from or if is more likely. However, we can predict if the latter is the case, we need to be well educated on defending our balance sheet 4 2

3 Defend your balance sheet! The time to use risk management is when your balance sheet is good. If you don t defend, you risk putting yourself in a position where others make decisions for you. 5 What does it take to defend your balance sheet? 1. Education on marketing tools 2. Belief in a simple philosophy 3. A plan/execution 4. Common Sense Risk Management 5. The knowledge to combine: crop insurance + marketing + cash sales 6 3

4 Simplicity offers the best solutions to everyday challenges, fortunately, the same is true for managing price risk 7 Each marketing year is unique. Managing price requires a consistent approach each year. Follow a philosophy you can trust and will work in all market environments. 8 4

5 Any strategy/risk management plan should be simple enough in that it can be explained and understood in a typical conversation 9 Many spent the past summer challenging USDA Reports In the meantime what did price do? 10 5

6 We have customers in Iowa and Minnesota. I also drive through there to visit customers. We understand the frustration of planted acres not planted acresprevent plant acres. 11 There is nothing to be gained by disputing government/usda numbers. There is, however, much to be gained by: learning managing risk being in control 12 6

7 End Result on the USDA Debate: So far we missed price breaking from $6.70 on Mar. 14 Corn futures and $14.09 ¾ on Mar. 14 Soybean Futures.even though you were right 13 What makes you believe there are advisors, brokers or any Ag Industry person has this ability? 14 7

8 Once you accept and believe price is not predictable, you then become an effective marketer. 15 Until then, you are just winging it, taking chances, risks speculating 16 8

9 3 Keys to Managing Risk Education on 1. Marketing Tools 2. Crop Insurance 3. Cash Markets/Sales 17 You have heard, even before me about the importance of having a marketing plan. However, in order to build a solid plan you must understand all the marketing tools and alternatives. 18 9

10 A plan should work in all market environments in all directions. However, how can you build a plan until you understand all tools available? 19 Futures Pros and Cons 20 10

11 Selling Options Pros and Cons 21 Cash Forward Sales 22 11

12 Options fit Risk Management for Farmers Those who like to say options do not work either have limited experience with them or did not manage them properly. 23 Do you want to risk a long premium, fixed amount or give away hard earned equity? 24 12

13 If an option position turns out positive, that is very good. If an option position turn out negative, that is perfectly okay. Better, in fact. 25 We understand the logic of not selling cash bushels if the weather is not cooperating. Where it gets difficult is the scenario where the weather improves but now price is significantly lower

14 Learn how to incorporate the purchase of a put into your marketing plan. This provides price protection without causing you to have concern. Should I sell? But what if it doesn t rain? 27 Managing your cash bushels is one of the 3 keys to successfully managing risk 28 14

15 Purchased Call Options In order to gain from higher prices most tend to do this by owning unsold cash bushels There are times this can be done in a much better, more economical way. 29 An inverse is an inverseneeds to be sold 30 15

16 Short Dated Options You need to understand how they work 31 New Crop Short Dated Options Currently, these options are listed for 2014 and that is the 3 rd crop year these have been available. These are a rival for OTC contracts. These options allow you to manage new crop prices while using a lesser amount of time vs. the traditional new crop option. They are currently available for corn, soybeans, and wheat

17 Short Dated vs. Traditional Options Find a way to educate yourself on how they work and if there is a fit for you business. 33 As a grower, its okay to root for higher prices as long as downside risk is managed There is risk of getting too bearish

18 Be wary of bearish strategies: Accumulators Short calls 35 Accumulators OTCs Knockouts Double ups Do you fully understand what these mean? Until you know Stay Away! 36 18

19 Options = 100% Price Managed 37 Change happens And it happens fast

20 Change happens fast! On July 7, 2013, December 2013 corn futures traded at $6.65 On November 19, 2013, December corn futures dropped to $4.11 This is a drop of $2.54/bu in just 4 months. How did you defend this? 39 Change happens fast! On July 14, 2013, January 2014 bean futures traded at $14.09 On November 19, 2013, January bean futures dropped to $12.68 This is a drop of $1.41/bu in just 4 months. How did you defend this? 40 20

21 The more things change The more they stay the same. Pendulum swings from 1 extreme to anothernever parks in the comfort zone 41 At a recent meeting, a question was asked whether the market understands we are at or near break even prices

22 Well... The market may or may not be aware, but it is not a factor if you expect it to increase price. Does the market react because the end user side/ethanol plants, livestock, feeders were under pressure with high grain prices? 43 Cost of production has been increasing with higher prices Now that prices are lower, are your costs coming down equally to price? With prices near break even levels for some, doesn t this mean we need a plan to manage price? Margin? 44 22

23 How do we manage new crop when below the cost of production? Does the market have to trade above breakeven? 45 Looking ahead to 2014 What is your plan? When will you lock in your inputs? Are you planning on taking crop insurance? What type of policy are you looking for? Are there add on product for your crop insurance policy you are interested in? Are you taking a weather policy? 46 23

24 Are we heading to an environment where price is not above breakeven all year? 47 Livestock producers have learned to manage margins. Now the grain guys may have to grind out a profitmay not be profitable all year 48 24

25 Are you long 2 crops? What's the plan? 49 It Really Is This Simple! Stored Bushels risk of lower prices to loan. Buy puts OR sell bushels with purchase of calls. Sold bushels risk of higher prices buy calls

26 Crop insurance is one of the 3 keys to managing risk 51 Crop insurance is a very important part of your plan Adding Crop Insurance to a well designed marketing plan is a great way to manage risk 52 26

27 Crop Insurance Has Many Benefits But It Is Not A Marketing Program What do you plan to do prior to when the crop insurance average is set? What do you plan to do when/if prices rise above average price level? Lastly, what will you do after 2 nd averaging period ends? Typically harvest/post harvest time period? 53 If today was 3/1/14, we would be looking at a Feb. average price for crop insurance of $4.65 on Corn and $11.65 on Soybeans

28 1/21/2014 For many, marketing has turned into procrastinating due to adverse weather Is this a sustainable plan year after year? Summer 2012 Summer 2012 Spring planted [These C USDA, crop [National Very Alabama Excellent Good Fair Poor Arkansas.. Arizona Georgia California Mississippi Louisiana... N Oklahoma... Virginia... Previous R ending Week State acreage] Colorado (percent) , , July Average Iowa Indiana... Illinois Kentucky... Kansas Minnesota Michigan Missouri Nebraska North Ohio... Pennsylvania South Texas... Tennessee Wisconsin rop epresents orth States conditions poor Progress Carolina Dakota ending Carolina Dakota 15 National 99% week year States zero. of the for Agricultural planted selected ) cotton 99% States Statistics of the are 2012 Service weighted cotton based onstatistics 2012 planted 1948 ISSN: Released Department Agriculture 007 July (USDA). of(july 15, 2013, by the National Agricultural Service (NASS), Agricultural Statistics Board, United States Cotton , Corn S States elected Silking Squaring Setting Condition States: Bolls Week Ending July We have become all or nothing on marketing risk tolerance Is it ok to be in a win lose position? 56 28

29 At the end of the day price is determined by supply and demand. So.if USDA is too high on acres or the crop isn't as good as implied, price will respond as it looks at demand. Final carryover Keys to Long Term Marketing Success 1.Marketing Education Learn the pros and cons of each tool 2.Crop Insurance 3.Understand Cash Markets 58 29

30 2013 and 2014 Marketing Patterns may need help from Mark Twain: When you find yourself on the side of the majority, it is time to pause and reflect. Mark Twain 59 You can always find someone to who will give you market info and marketing ideas. Are they sound or origination based? Our Trusted Brokers at Advance Trading won t tell you what to do. We like to teach. We bring you sound ideas. We illustrate just exactly what your risk may be

31 Want to stay informed on the latest market information? Follow me on You can also reach me by at trading.com 61 Disclaimer This data is provided for information purposes only and is not intended to be used for specific trading strategies without consulting Advance Trading, Inc. Because trading futures and options normally involves risk, determining the appropriateness of hedging with futures and options can only be made on a case by case basis. All information is based upon data that is believed to be reliable. However, we cannot guarantee the accuracy or completeness of the data 62 31