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Market Plus: Jan 01, 2010: Market Analyst Tomm Pfitzenmaier

posted on December 30, 2009

Market Plus: Jan 01, 2010: Market Analyst Tomm Pfitzenmaier Pearson: This is the Friday, January 1, 2010 version of Market Plus here at our Market to Market Web site. I'm Mark Pearson. Glad you've joined us. Happy New Year everybody. With us is Tomm Pfitzenmaier. Tomm, I'll tell you what, I think you had some good advice for producers out there. Input costs, as you pointed out on the show, are down a hair and fertilizer is down, the big one, and diesel fuel is down a little bit over the last year too. So, a couple of good points to keep in mind. The seed prices about the same, maybe a little higher.

Pfitzenmaier: Probably not so much there.

Pearson: Not so much there. But looking forward right now we can pencil in what our costs look like and you're saying there's profit out there in 2010 that may not be there later on. Why not take advantage of it?

Pfitzenmaier: Well, the thing that prompts me to say this is that people have been calling me over the last two or three weeks sort of bragging that they had sold corn, December of 2010, for $4.00. I say, you can buy a December $4.40 put, which if you use any kind of a basis at all is going to lock you in $4.00 plus, probably $4.10 plus and go out and sell a $5.40 call and get that done for 10, 12 cents. Why in the world would you lock yourself in to $4.00 when you can buy a floor that is higher than that and leave the upside open for another dollar? I don't know if we're going higher or not. Who knows. But it's certainly not going to get anything better if you just flat out sell it. Here is a chance to really participate in any little rallies that come along, a chance to leave your basis open. We all saw last summer and last fall what happens, that basis can get really interesting if you've got storage and you've got it hedged rather than forward sold. So, that is creating a great opportunity, I think, for producers rather than just going out and making a sale like they have always done. Here is a chance to use those options to really give yourself a leg up here.

Pearson: And relatively inexpensive. Now, you're going to accomplish that by -- you're going to go ahead and do the option contract and then sell the call and so your net costs are coming down to 12 cents?

Pfitzenmaier: Actually what we've been doing is buying the December $4.40 put, selling the $5.40 call and then going ahead and selling a July $3.80 put which is about 45 cents under where we're trading right now our theory being that by the time June, when those go off the board in June we probably aren't going to break corn more than 40 or 50 cents so those will expire worthless. You'll have that to stick in your pocket. Probably the $5.40 is going to expire worthless and we got those done for as little as six, seven cents this week. So, to me that is kind of trading the directions in the market, trying to take advantage of some situations here with the option market to get your costs back down and yet clear an opportunity for yourself.

Pearson: All right. Soybeans, what is your strategy there? You're selling soybeans too.

Pfitzenmaier: A little different strategy on the soybeans. We're buying the $9.40 puts which is about 60 cents or so under where the market is trading. We're selling $12 calls to pay for it and then we're saying that we don't think November beans are probably going to go under $7.40 so then we're going ahead and selling the $7.40 put against the $9.40 put, have been getting that done for around a nickel. So, you've got a chance to protect that range from $9.40 to $7.40 which most people think is probably going to contain the soybean market and you have very little money tied up in the situation. Now, you can adjust those up a little bit or down a little bit depending on how much you want to spend and what kind of a floor you want to put in. But that is kind of the way we're looking at it. Now, if you believe we're going to have this big lull of beans coming and you're looking for a strategy to flat out sell beans I wouldn't argue with that either and you can sell new crop November 2010 beans in that $10.25 to $10.45 area you can make a pretty good case for just going ahead and making some sales there too.

Pearson: All right. Good option strategies for corn and soybeans, costs are very limited. Risk is relatively limited as well.

Pfitzenmaier: There's some risk. I mean, if the market goes against you you're going to have margin implications and all that and you'd want to talk to whoever is helping you do it to understand how all that works. But minimal cost really.

Pearson: Absolutely. All right. Great strategies as usual, some great insights from Tomm Pfitzenmaier. Always good to have Tomm join us on Market to Market and here on at Market Plus on our Market to Market Web site. Tell your friends and neighbors to join us here too. From all of us here on Market to Market, I'm Mark Pearson wishing all of you a Happy New Year.

Tags: agriculture commodity prices markets news