Presented by: Richard Edmunds, ARA, AAC 82 nd Annual Meeting of ASFMRA Phoenix, Arizona 1.
2009 Commodity Marketing Alternatives ASFMRA Denver, Colorado October 29, 2009.
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Transcript of 2009 Commodity Marketing Alternatives ASFMRA Denver, Colorado October 29, 2009.
2009
Commodity Marketing Alternatives
ASFMRA
Denver, Colorado
October 29, 2009
2009
2009
Available Marketing Tools
Cash Markets Forward Cash Markets Hedge to Arrive Contracts Futures and Options Contracts Managed Programs
2009
Available Marketing Tools
Cash MarketThe simplest and easiest alternative.Good option if you expect the cash market to
fall and basis to weaken. Forward Cash Market
Also a simple alternative.Subject to production risk and counter-party
risk.
2009
Available Marketing Tools
Hedge-to-Arrive Future price is set on the contract date, but basis is
left to be determined at a later date. Production risk and counterparty risk is not
eliminated. Good option if you expect the cash market to fall and
basis to strengthen. Traditionally, cash and futures tend to converge into
expiration, but this is not guaranteed. Basis may act differently in one area of the country vs. another.
2009
Available Marketing Tools
Futures and Options Contract price is set when hedge enacted, but basis is not
affected. Counterparty risk is eliminated via exchange clearing. Futures may require margin deposits to keep hedges in effect. Contracts are of standardized size and length, making them
easy to exit should your hedging strategy change. Options may have tax/legal implications making them
inappropriate for some managers. The number of futures contracts held cannot exceed expected production or tax implications will result.
2009
Best-Fit Alternatives for Different Market Conditions
Adapted from NCR 215-4, “Developing Marketing Strategies and Keeping Records on Corn, Soybeans and Wheat”, John Ferris, December 1985
2009
For Farm Managers
•Cash sales are most simple and easy•Forward contracts and HTAs should be considered on up to 50% of production•Futures and options normally not a good alternative….little peace of mind
2009
2009
1. Establish a realistic goal
2. Identify your decision-making environment
3. Identify your beliefs
4. Develop a price outlook
5. Consider cost of production
6. Consider risk-bearing ability
7. Avoid emotional decisions
8. Don’t let ego get in the way
** Evaluate Market Performance
Developing a Marketing Plan
**Directives**
2009
1. Establish a realistic goal
Define what success means to you
2. Identify your decision-making environment
Who can second-guess your marketing decisions?
Which risk management tools do they understand and/or not understand?
Developing a Marketing Plan
2009
3. Identify your beliefs (biases)
Examples for the grain markets:
The Chicago Board of Trade is fixed. No way a farmer can win in that game.
I know as much as anybody about the market because I grow the crop. ‘If I don’t know it, it ain’t worth knowing.’
No need to worry about marketing. As long as I grow a big crop, the government programs will keep me in business.
Developing a Marketing Plan
2009
Determine your fixed and variable costs
Write your outlook down and update it as needed
Have a price outlook for both the short-term (now through 6 months) and long-term (6 to 18 months out)
4. Develop a price outlook
5. Consider cost of production
Remember that the market does not care what your costs are
Developing a Marketing Plan
Remember that not everyone’s costs are the same
2009
6. Consider risk-bearing ability
A highly leveraged producer will look differently at marketing than a producer with a low debt-asset ratio
Developing a Marketing Plan
7. Avoid emotional decisions
Outsourcing this function of the business to a professional or advisor is the simplest way to avoid unnecessary emotion if this is an issue
8. Don’t let ego get in the way
2009
2009
Helps you maintain focus on principal goals
De-emphasizes speculation
Provides a tool for discussion
Provides a way to track our performance
Evaluate Market Performance
Most IMPORTANT step
Developing a Marketing Plan
2009
Market TRAKCompany Name: Jones FarmsCommodity: CornCrop Year: 1988/89Production: Bushels
Cash Activity Futures Activity F & O Summary Summary
DateCash Price
Units Sold Price
Del. Period
Cum. %
SoldCum. Val.
SoldContract Mth/Yr.
Qty. Hedged
Qty. Lifted Price Open P/L Closed P/L Cum. P/L Gross Value
Value/Unit
2/1 1.90$ Dec 04 190,000$ 1.90$ 3/1 2.00$ Dec 04 -5 2.20$ -$ 200,000$ 2.00$ 4/4 2.03$ Dec 04 (750)$ 202,250$ 2.02$ 5/2 2.08$ Dec 04 (2,000)$ 206,000$ 2.06$ 6/1 2.22$ Dec 04 (5,500)$ 216,500$ 2.17$ 7/1 3.35$ 25,000 3.35$ 25% 83,750$ Dec 04 -5 3.53$ (33,750)$ 301,250$ 3.01$ 8/1 2.78$ 25,000 2.78$ 50% 153,250$ Dec 04 (5,250)$ 287,000$ 2.87$ 9/1 2.60$ 153,250$ Dec 04 3,750$ 287,000$ 2.87$ 10/2 2.50$ 153,250$ Dec 04 8,750$ 287,000$ 2.87$ 11/4 2.40$ 50,000 2.40$ 100% 273,250$ Dec 04 10 2.60$ 13,750$ 13,750$ 13,750$ 287,000$ 2.87$
Summary StatementRange $1.90-$3.35Range Mid-Point $2.62Top 1/3 $2.87
Average Market Price $2.73Futures P/L $0.14
$2.87Carry Adjustment $0.12Selling Price $2.99
100,000
2009
Fundamental and Technical Analysis
2009
Fundamental Analysis
Assessment of underlying supply and demand variables and the changes in those relationships as a means to project prices
StepsProjecting future supply & usageProject prices based on future supply & usageCompare fundamental price to market price
2009
Fundamental Analysis
Believes in Market Efficiency…that the market price is always searching
for the true fundamental price/fair value Not practical to use in the short-term due
to various human factors Time lag exists for correction
2009
Balance Sheets
USDA reports their estimates monthly in the World Agriculture Supply and Demand (WASDE) reports
USDA and Brock Associate estimates can be found in the Brock Report
2009
Balance Sheets Most popular tool in fundamental analysis Constantly updated at new info is introduced Unit of analysis is marketing year
Corn: Sep 1 – Aug 31 Soybeans: Sep 1 – Aug 31 Wheat: Jun 1 – May 31 Cotton: Aug 1 – Jul 31 Oil & Meal: Oct 1 – Sep 30 Livestock: Jan 1 – Dec 31
2009
08/09 Est. 09/10 Est. 08/09 09/10 10/11 11/12ACREAGE (Mil. Acres)Planted Area 86.0 86.4 86.0 86.4 87.0 88.0Harvested Area 78.6 79.3 78.6 79.3 80.0 80.1Yield 153.9 164.2 153.9 162.5 163.0 164.0SUPPLY (Mil. Bushels)Beg. Stocks (Sep 1) 1,624 1,674 1,624 1,674 1,722 1,772Production 12,101 13,018 12,101 12,886 13,040 13,136Imports 14 10 14 12 10 10 Total Supply 13,739 14,702 13,739 14,572 14,772 14,918USAGE (Mil. Bushels)Feed & Residual 5,231 5,400 5,231 5,225 5,225 5,250Food/Seed/Ind 4,976 5,480 4,976 5,475 5,575 5,755 Ethanol for Fuel 3,700 4,200 3,700 4,200 4,350 4,500 Domestic Use 10,207 10,880 10,207 10,700 10,800 11,005Exports 1,858 2,150 1,858 2,150 2,200 2,200 Total Use 12,065 13,030 12,065 12,850 13,000 13,205STOCKS (Mil. Bushels)Ending Stocks (Aug 31) 1,674 1,672 1,674 1,722 1,772 1,713 CCC 0 0 0 0 0 0 Privately-Owned 1,674 1,672 1,674 1,722 1,772 1,713Stocks/Use 13.9% 12.8% 13.9% 13.4% 13.6% 13.0%Farm Price ($/Bu) $4.06 $3.05-$3.65 4.06$ $3.00-3.75 $3.00-3.75 $3.00-3.75
Brock Est.
US CORN SUPPLY AND DEMANDUSDA
2009
Complex set of variables impact crop prices
Acreage Yield Weather Exchange rates Consumer income Government policies Foreign production
Lack of adequate knowledge of demand relationships
Degree of inventory speculation
Constant change
2009
USDA Interagency Consensus Process Foreign Agriculture Service (FAS)
Foreign production, use and trade Economic Research Service (ERS)
Economic effects of prices, quantity supplied/demanded Farm Service Agency (FSA)
Current policy environment & farmer’s reaction to policies National Agricultural Statistics Service (NASS)
Current statistics and Ag Census every 5 years Agricultural Marketing Service (AMS)
Current price & marketing reports World Agricultural Outlook Board (WAOB)
Coordinate interagency process to produce WASDE est.
2009
Construction of Fundamental Price
Build supply side
Build consumption or use side
Price then ties both sides together by rationing available supplies to competing uses
2009
Supply Side Production = (acres planted * loss ratio *
yield/acre) Concerned with acreage shifts between
cropsExpected crop priceExpected price of substitutes Input prices, technological changes, risk:return,
government programs, lagged effects Trendline yield crop conditions yield est
2009
Consumption Side - Corn
Feed and Residual Primary driver of prices, ~60% of total consumption Reflects any measurement errors & unaccounted use
Exports Little growth in last 25 years Largest customers: Japan, Mexico, Tawain, Canada
Food, Seed, and Industrial Sweeteners, construction starches, cereals, etc. Rapid growth last 20 yrs (ethanol)
2009
Consumption Side - Soybeans
Feed, Seed, and Residual Smallest component of soybean use Reflects measurement errors and unaccounted use
Exports Moderate growth last 25 years Primary customers: China, EU, Mexico, Taiwan
Crush Primary driver of prices, meal & oil prices Averages ~ 60% of total use
2009
U.S. CORN FREE STOCKS As a Percent of Use Vs. Average Price
10
0908
07
0605
0403
02 01 0099
98
97
96
95
94
93
9291 9089
88
87
86
85
84
8382
81
80
79
7877
76
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%
Corn Ending Free Stocks to Use Ratio
Av
era
ge
Fa
rm P
ric
e (
Do
llars
/Bu
sh
el)
2009
Projected Average 2009/10 Marketing Year Corn Farm Price Given a Range of Possible Yield Outcomes
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
135 140 145 150 156 160 165 170 175 180 185
Corn Yield Possibilities for 2009 (Bushels/Acre)
US
Ave
rag
e 20
09/1
0 F
arm
Pri
ce
(Do
llar
s/B
ush
el)
Expected High End of Price RangeExpected Low End of Price Range
The average marketing year farm price is projected between $3.00 and $3.75 given the current Brock Associates acreage estimate of 86.4 million acres, yield estimate of 162.5 bushels/acre and 12,850 million bushel demand expectation.
2009
26%2008/09
2002/03
1996/97 18% 18%1988/89 2007/08 2001/02
1984/85 1989/90 13% 1990/91
1983/84 1987/88 2005/06 1982/83
1981/82 1986/87 2004/05 1979/80
1976/77 5% 5% 1985/86 1995/96 1973/74
1975/76 3% 3% 3% 3% 3% 1998/99 3% 1999/00 1978/79 1994/95 1972/73
1974/75 1997/98 1980/81 2000/01 1993/94 2006/07 1991/92 2003/04 1977/78 1970/71 1992/93 1971/72
September October November December January February March April May June July August10 1 1 1 1 1 2 1 2 7 5 7
Corn Seasonality
Percent Highs
1970/71-2008/09
Central Illinois
Year begins Sept 1.
2009
23% 23%21% 2005/06 2002/03
2007/08 2003/04 1997/98
2006/07 2001/02 15% 1991/92
2000/01 1994/95 1999/00 1988/89
1995/96 1992/93 1998/99 1985/86
1989/90 1990/91 8% 1996/97 1981/82
1987/88 1986/87 2004/05 5% 1993/94 1980/81
1978/79 1982/83 1972/73 2008/09 3% 3% 1984/85 1976/77
1977/78 1973/74 1971/72 1975/76 1979/80 1974/75 0% 0% 0% 0% 1983/84 1970/71
September October November December January February March April May June July August8 9 3 2 1 1 0 0 0 0 6 9
1970/71-2008/09
Year begins Sept 1.
Central Illinois
Percent Lows
Corn Seasonality
2009
28%2007/082006/072000/01
18% 1995/962008/09 15% 1994/951997/98 13% 2004/05 1992/931990/91 2002/03 1991/92 1989/901988/89 1999/00 1987/88 1979/80 8%1984/85 5% 5% 1996/97 1986/87 1975/76 2001/021983/84 3% 1998/99 3% 3% 1985/86 1993/94 1978/79 1973/74 1982/831981/82 1974/75 1980/81 0% 2005/06 0% 2003/04 1976/77 1977/78 1972/73 1970/71 1971/72
September October November December January February March April May June July August7 1 2 0 1 0 1 2 5 6 11 3
Soybean Seasonality
1970/71-2008/09
Central Illinois
Percent Highs
Year begins Sept 1.
2009
31%
2004/05 28%
2002/03 2005/062001/02 2003/041994/95 1999/001992/93 1997/98
15% 1991/92 1993/942007/08 1989/90 1988/892006/07 1986/87 1985/861995/96 1982/83 8% 1984/851987/88 1977/78 5% 5% 1998/99 1981/821978/79 1973/74 1996/97 3% 1979/80 3% 3% 1990/91 1980/811970/71 1972/73 1971/72 2008/09 1975/76 1974/75 0% 2000/01 0% 0% 1983/84 1976/77
September October November December January February March April May June July August6 12 2 1 2 1 0 1 0 0 3 11
Percent Lows
Year begins Sept 1.
Soybean Seasonality
1970/71-2008/09
Central Illinois
2009
Fundamental vs. Technical
Fundamentals embraced by academia, economists, and other believers in market efficiency
General Rule: Use Fundamental Analysis for “what” to do and Technical Analysis for “when” to do it
“Fortune tellers live in the future. So do people who want to put things off. So do fundamentalists.”
Ed Seykota
2009
Technical Analysis
Use of historic prices to predict future prices or direction
Used to make timing decisions when the fundamentally over/under values
2009
Advantages Provides timing for establishing and lifting
hedges Less emotional than fundamental
analysis
Disadvantages
Enter and exit markets more frequently than fundamental analysis
May give conflicting technical signals
2009
Volume Total Number of contracts traded on a given Day
High Volume reinforces buy and sell signals
Number of Contracts outstanding
Indicates who is buying or selling
Open Interest
2009
Decrease Increase
Short Covering New Buying
Long Liquidation New Selling
Incr
ease
Dec
reas
e
Pri
ce C
han
ge
Open Interest Change
2009
High
Close
Low
2009
Market Trends
1. Up (Higher Highs and Higher Lows)
2. Sideways
3. Down (Lower Highs and Higher Lows)
2009
2009
2009
Market Reversals
Indicates a change in the direction of the trend
2009
Key Reversals Bearish Key Reversal
1. Market is in an Uptrend2. High is higher than previous day’s high and low is lower
than previous day’s low3. Close below previous day’s close
Bullish Key Reversal
1. Market is in an Downtrend2. Prices are higher than previous day’s high and lower than
previous day’s low3. Close above previous day’s close
2009
2009
2009
Technical Tools and Indicators Five and Nine Week Rules (Trend Following)
Five Wave Patterns (Reversal Patterns)
Moving Averages
Disparity (Overbought and Oversold Conditions)
Commitments of Traders (Position of Market Participates)
2009
Corn Five-Week Rule
2009
Soybean Nine-Week Rule
2009
Moving Averages
Widely used by commodity funds Types of Moving Averages
Simple Exponential Weighted
2009
Simple Moving Averages
2009
Simple Moving Averages
2009
Commitments of Traders Report
When Large Speculators & Commercials are at opposite extremes look for a trend change
Categories Reported Large Speculators Commercial Companies Small Participants Index Funds
2009
Soybeans: Commitments of TradersFutures and Options Combined, as October 6, 2009
-250000
-200000
-150000
-100000
-50000
0
50000
100000
150000
200000
10/6/2008 12/6/2008 2/6/2009 4/6/2009 6/6/2009 8/6/2009 10/6/2009
5,00
0 b
ush
el c
on
trac
ts
Large Speculators Commercial Small Participants Index Funds
2009
Other Technical Tools
Gap Theory Flag Formations Price Strength Index
2009
Type of Gaps
1. Common gaps- Occur anywhere and have no significance.
2. Break-away gaps- Signal the beginning of a bull market after a bottom and the beginning of a bear market after a top
3. Measuring gaps-Occur at the halfway point of a move
4. Exhaustion gaps- Occur near a major top of near a major bottom.
2009
Measuring Gap Objective
2009
Bear Flag
Center of the Flag
2009
For More Information on the Brock Report, write, email or call
BROCK ASSOCIATES2050 W. Good Hope Rd.
Milwaukee, WI 53209(800) 558-3431
www.brockreport.com [email protected]